Challenges Coming This Winter
Energy futures continue to hold near 9-month highs in spite of more weak fundamental data as the market seems to continue to care more about the chance of economic recovery 6-12 months down the road, and less about the challenges to be overcome this winter.
There is some doubt creeping in to the market, as we saw early gains in Monday’s session wiped out mid-day, which could be a sign that the bulls have outkicked their coverage with a 40% price rally when demand was on the decline. Whether or not prices can punch through last Thursday’s highs this week, which should spark another technical rally, should determine if we end the year in rally mode, or with a downward correction.
OPEC’s monthly oil market report revised its demand estimates slightly lower for 2020 and 2021, as the U.S. & Europe saw weaker than expected fuel consumption, offset largely by better than predicted demand in China and India. The report also highlighted the recovery in diesel margins for gulf coast refiners in recent weeks as inventories have drawn down and production has slowed, whereas gasoline margins continue to struggle in most regions. The cartel’s output rose by more than 700mb/day during November, almost all of which was due to Libya’s rapid resurgence, adding more than 1 million barrels/day of output in the past 2 months since a truce agreement allowed production to resume.
The IEA’s monthly report also had a small downward revision in its global oil demand forecasts from last month’s report, largely due to weak jet/kerosene demand. The report also highlighted the change in forward curves for oil from contango to backwardation due to stronger Asian demand and OPEC’s output cuts, which won’t help refiners that are expected to face a long winter.
A few interesting refinery-related headlines this week:
The refinery formerly known as Hovensa sold its first products in the past week after nearly a year delay in startup.
Shell completed the permanent shutdown of its Convent LA refinery.
Exxon and P66 both outlined their intentions to improve on environmental sustainability. Exxon’s GHG reductions are focused on lowering methane flaring and other upstream avenues, while P66 laid out its reduced spending plan including the conversion of its Rodeo, CA refinery to renewable production in 2024.
Last, Marathon is starting a new program to deter birds from its Robinson, IL facility (you’ll need a subscription to access that article).
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Energy Futures Are Caught Up In Headline Tug-O-War This Morning
Energy futures are caught up in headline tug-o-war this morning with Canadian oil production concerns and a positive US GDP report trying to push prices higher while sinking Chinese demand worries and Gaza ceasefire hopes are applying downward pressure. The latter two seem to be favored more so far this morning with WTI and Brent crude oil futures down ~45 cents per barrel, while gasoline and diesel prices are down about half a cent and two cents, respectively.
No news is good news? Chicago gasoline prices dropped nearly 30 cents yesterday, despite there not being any update on Exxon’s Joliet refinery after further damage was discovered Wednesday. Its tough to say if traders have realized the supply situation isn’t as bad as originally thought or if this historically volatile market is just being itself (aka ‘Chicago being Chicago’).
The rain isn’t letting up along the Texas Gulf Coast today and is forecasted to carry on through the weekend. While much of the greater Houston area is under flood watch, only two refineries are within the (more serious) flood warning area: Marathon’s Galveston Bay and Valero’s Texas City refineries. However, notification that more work is needed at Phillip’s 66 Borger refinery (up in the panhandle) is the only filing we’ve seen come through the TECQ, so far.
Premiums over the tariff on Colonial’s Line 1 (aka linespace value) returned to zero yesterday, and actually traded in the negatives, after its extended run of positive values atypical of this time of year. Line 1’s counterpart, Line 2, which carries distillates from Houston to Greensboro NC, has traded at a discount so far this year, due to the healthy, if not over-, supply of diesel along the eastern seaboard.
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WTI And Brent Crude Oil Futures Are Trading ~$1.50 Per Barrel Lower In Pre-Market Trading
The across-the-board drawdown in national energy stockpiles, as reported by the Department of Energy yesterday, stoked bullish sentiment Wednesday and prompt month gasoline, diesel, and crude oil futures published gains on the day. Those gains are being given back this morning.
The surprise rate cut by the People’s Bank of China is being blamed for the selling we are seeing in energy markets this morning. While the interest rate drop in both short- and medium-term loans won’t likely affect energy prices outright, the concern lies in the overall economic health of the world’s second largest economy and crude oil consumer. Prompt month WTI and Brent crude oil futures are trading ~$1.50 per barrel lower in pre-market trading, gasoline and diesel are following suit, shaving off .0400-.0450 per gallon.
Chicagoland RBOB has maintained its 60-cent premium over New York prices through this morning and shows no sign of coming down any time soon. Quite the opposite in fact: the storm damage, which knocked Exxon Mobil’s Joliet refinery offline on 7/15, seems to be more extensive than initially thought, potentially extending the repair time and pushing back the expected return date.
There are three main refineries that feed the Chicago market, the impact from one of them shutting down abruptly can be seen in the charts derived from aforementioned data published by the DOE. Refinery throughput in PADD 2 dropped 183,000 barrels per day, driving gasoline stockpiles in the area down to a new 5-year seasonal low.
While it seems all is quiet on the Atlantic front (for now), America’s Refineryland is forecasted to receive non-stop rain and thunderstorms for the next four days. While it may not be as dramatic as a hurricane, flooding and power outages can shut down refineries, and cities for that matter, all the same, as we learned from Beryl.