Calm Between Storms For Energy Markets

Market TalkFriday, Oct 30 2020
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The calm between storms has set in on energy markets to start Friday’s trading with only fractional moves so far, after a week of mostly heavy selling. The dark cloud of rapidly rising COVID counts continues to hang over markets around the globe, while next week’s election is expected to create even more volatility. 

November RBOB and HO contracts expire today, so watch the December contracts (RBZ/HOZ) for price direction today. RBOB futures reached their lowest levels since May during Thursday’s selloff, but held support just above the $1 mark, holding off a technical collapse for now. WTI and ULSD finally found a bid just a few ticks above their June lows meaning the sideways pattern is still hanging on by a thread. If the range finally breaks down, it looks like we’ll see another 10-20 cent drop for products in short order. 

Gulf Coast gasoline prices joined the Group 3 market in the under $1 club Thursday. Chicago and NYH prices are just about a nickel away, while West Coast values still have more than a dime to fall before reaching that level. Ethanol prices saw their bubble burst as both corn and gasoline prices have plummeted this week. The upward momentum in RIN values also appears to have stalled out temporarily, with the weaker commodity values and the announcement that there will be one less obligated refinery requiring RINs next year managing to push both D4 and D6 prices back down from multi-year highs.

Big Oil earnings reports for Q3 being released this week are shedding more light on the challenging environment that’s forcing more job cuts, even with oil prices trading north of $40 for most of the quarter. Q4 is looking even worse with the drop in prices the past couple of weeks, and demand forecasts continuing to decline. While most OPEC members don’t release earnings reports like public corporations due, it’s fairly easy to extrapolate that they’re facing similar challenges, which makes the need to extend production cuts clear, although the will to do so from some members is less so.

The parade of hurricanes in the Gulf Coast isn’t helping oil producers as several noted in their earnings reports the reduced output and additional costs of having to shut in and restart production (not to mention shuttling employees to and from the rigs) have happened at the worst possible time.

As the Atlantic Coast dries out from the remnants of Hurricane Zeta today, the NHC is already giving a high probability of another named storm forming over the weekend. The disturbance has 80% odds of becoming the next named storm as it moves into the Caribbean over the next five days, but so far the NHC isn’t publishing a potential path for after it develops. This is close to where both hurricanes Delta and Zeta formed, so another hit to the Gulf Coast is still possible even as we move into the last few weeks of the season. 

Another one bites the dust: BP announced it would shut Australia’s largest refinery, converting it to an import terminal, as operating the plant was no longer “economically viable." At 150mb/day, the plant is not large by U.S. refining standards, and won’t be missed in the current environment, but is the latest in a long string of rationalizations globally that’s expected to continue as long as demand is weak.

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

TACenergy MarketTalk 103020

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Market TalkMonday, Apr 15 2024

Gasoline And Crude Oil Prices Reached Fresh Multi-Month Highs Friday Morning As News Of The Anticipated Attacks Spread

Buy the rumor, sell the news seems to be the pattern for energy contracts that are heading lower this morning after Iran’s well-telegraphed attack on Israel over the weekend was thwarted by a coalition of air forces and no further escalation has ensued so far.

Gasoline and crude oil prices reached fresh multi-month highs Friday morning as news of the anticipated attacks spread, and those new highs keep the technical outlook pointing higher on the weekly charts, but we’ll need to see a new high set this week or else the argument for the end of the spring rally may begin.

Marathon reported unplanned flaring at the Wilmington section of its Los Angeles area refining complex early this morning, a week after reported issues at the Carson facility, which combined make up the largest refinery in the state. California’s basis values did pull back sharply after a big rally last week, and now we’ll wait to see if this latest upset sends them higher once again.

Money managers continue to act moderately bullish on energy contracts, adding net length across the board last week, even as new short positions were added in most of the contracts.

Perhaps most notable in the COT report last week was a surge in open interest with RBOB gasoline reaching its highest level in 3 years, while Brent crude oil contracts reached their highest levels since the full-scale invasion of Ukraine kicked off more than 2 years ago.

It seems likely that the increased violence around the Middle East, and the attacks on Russian refineries are contributing to the increase in bettors in the energy space, particularly now that margin requirements have returned to more tolerable levels after spiking during the chaotic trading of 2022. This same pattern may also be contributing to the surge in energy company stock prices, even though margins are far below the record-setting levels we saw the prior 2 years.

The big increase in short bets on gasoline last week also suggests that some traders are starting to prepare for the spring peak in prices that often happens in late April or May.

A Reuters report suggests that Russia has been able to repair nearly 1/3 of the refining output that was taken offline due to Ukraine’s drone strikes, bringing the offline capacity to 10% down from 14% at the end of March, but that still means more than 650,000 barrels/day of capacity is offline, roughly the size of the largest refinery in the US.

Baker Hughes reported a drop of 2 oil rigs last week, erasing the increase in the rig count we saw the week before. Natural gas rigs continue to decline, falling by 1 last week to a fresh 2 year low at 109 total for the US. Baker Hughes changed the format of their report a couple of weeks ago, which is still challenging some data providers and analysts who continue to report the last numbers that show up on the old report.

A CNN article over the weekend highlighted the challenges still being faced at the PES refinery outside of Philadelphia nearly 5 years after an explosion knocked that plant offline for good. This type of struggle is one major factor in why some refiners are choosing to convert their facilities to renewables production in recent years, which effectively extends their timeline on any remediation needed if the facility was closed for good.

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

Pivotal Week For Price Action
Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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

Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

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