Ceiling On Energy Prices Remains Intact
The ceiling on energy prices is intact for now and futures are slipping after failing to break through to the upside on Wednesday. A pair of negative monthly reports from OPEC and the IEA are getting credit for the pullback, while technicians will tell you this type of selling is normal when chart resistance repels a rally. The drop in prices after a dramatic November rally has been minor (and as this is being written WTI has moved back into positive territory) suggesting we are likely to see another test of that price ceiling again in the near future.
OPEC’s monthly report reduced its demand outlook as consumption in the America’s was below expectations and new COVID-containment measures in Europe are reducing transportation. In addition to the worsening demand outlook, the OPEC report showed the cartel’s output increased in October as Libyan production (which is exempt from the output cut agreement) started to come back online. What could be worse is that Libyan output increased to 454,000 barrels/day in October, and is expected to reach one million barrels/day in November, putting more pressure on the market.
There has been concern that the regime change in the U.S. may mean more Iranian oil comes back to the world market just in time for no one to need it, further adding to the bleak fundamental outlook. Not so fast, according to a new IAEA report, Iran’s enriched uranium stockpile is 12 times the agreed upon amount, making the removal of sanctions much more complicated, and making it less likely that the world will smile upon a new deal this year.
The IEA’s monthly oil report shows a similar pattern as OPEC with demand expectations slipping while supply increases. The IEA’s report also threw some cold water on the vaccine optimism that swept global markets earlier in the week suggesting there will not be a significant impact in the first half of 2021. The count of global refinery permanent shutdowns stands at 1.7 million barrels/day, but “Significant structural overcapacity” remains with approximately 20 million barrels/day of temporarily idled distillation capacity worldwide, suggesting more closures are coming.
Right on cue, Scotland’s lone refinery announced that two units idled due to the drop in demand this year will be shuttered permanently.
Eta made a second landfall in Florida north of Tampa this morning, as a tropical storm with sustained winds around 50 mph and is moving across the state, heading for Jacksonville this afternoon before reemerging in the Atlantic. The storm’s path and relative lack of strength means it should not disrupt port traffic for long. The tropical wave churning in the Caribbean now has 90% odds of being named, and we should know early next week if it will be yet another Gulf Coast threat.
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View AllEnergy Prices Up Over 2% Across The Board This Morning
Refined product futures traded in an 8-10 cent range yesterday with prompt heating oil settling up ~6 cents and RBOB ending up about flat. Oil prices clawed back some of the losses taken in the first two full trading days of the week, putting the price per barrel for US crude back over the $70 mark. Prices are up just over 2% across the board this morning, signifying confidence after the Senate passed the bipartisan debt ceiling bill last night.
The EIA reported crude oil inventories up 4.5 million barrels last week, aided by above-average imports, weakened demand, and a sizeable increase to their adjustment factor. The Strategic Petroleum Reserve continues to release weekly through June and the 355 million barrels remaining in the SPR is now at a low not seen since September 1983. Exports increased again on the week and continue to run well above last year’s record-setting levels through the front half of the year. Refinery runs and utilization rates have increased to their highest points this year, both sitting just above year-ago rates.
Diesel stocks continue to hover around the low end of the 5-year range set in 2022, reporting a build of about half of what yesterday’s API data showed. Most PADDs saw modest increases last week but all are sitting far below average levels. Distillate imports show 3 weeks of growth trending along the seasonal average line, while 3.7 million barrels leaving the US last week made it the largest increase in exports for the year. Gasoline inventories reported a small decline on the week, also being affected by the largest jump in exports this year, leaving it under the 5-year range for the 11th consecutive week. Demand for both products dwindled last week; however, gas is still comfortably above average despite the drop.
The sentiment surrounding OPEC+’s upcoming meeting is they’re not likely to extend oil supply cuts, despite prices falling early in the week. OPEC+ is responsible for a significant portion of global crude oil production and its policy decisions can have a major impact on prices. Some members of OPEC+ have voluntarily cut production since April due to a waning economic outlook, but the group is not expected to take further action next week.
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Prices Are Mixed This Morning As The Potential Halt In U.S. Interest Rate Hikes
Bearish headlines pushed refined products and crude futures down again yesterday. Prompt RBOB closed the month at $2.5599 and HO at $2.2596 with WTI dropping another $1.37 to $68.09 and Brent losing 88 cents. Prices are mixed this morning as the potential halt in U.S. interest rate hikes and the House passing of the US debt ceiling bill balanced the impact of rising inventories and mixed demand signals from China.
The American Petroleum Institute reported crude builds of 5.2 million barrels countering expectations of a draw. Likewise, refined product inventories missed expectations and were also reported to be up last week with gasoline adding 1.891 million barrels and diesel stocks rising 1.849 million barrels. The market briefly attempted a push higher but ultimately settled with losses following the reported supply increases implying weaker than anticipated demand. The EIA will publish its report at 10am this morning.
LyondellBasell announced plans yesterday to delay closing of their Houston refinery, originally scheduled to shut operations by the end of this year, through Q1 2025. The company “remains committed to ceasing operation of its oil refining business” but the 289,000 b/d facility remaining online longer than expected will likely have market watchers adjusting this capacity back into their balance estimates.
Side note: there is still an ongoing war between Russia and Ukraine. Two oil refineries located east of Russia's major oil export terminals were targeted by drone attacks. The Afipsky refinery’s 37,000 b/d crude distillation unit was struck yesterday, igniting a massive fire that was later extinguished while the other facility avoided any damage. The attacks are part of a series of intensified drone strikes on Russian oil pipelines. Refineries in Russia have been frequently targeted by drones since the start of the military operation in Ukraine in February 2022.