Drop In Oil Stocks And A Major Refinery Closure
A large drop in oil stocks and confirmation of a major refinery closure sent the energy complex soaring on Wednesday, but those prices are coming back a bit this morning as a less bullish fundamental picture begins to take shape.
Yesterday’s DOE report – headlined by a huge 12 million barrel decline in crude stocks - came out around the same time as reports that city & company officials were confirming that the PES refinery would be closed down next month.
While futures reacted strongly to the news, with RBOB up a dime at some points during the day, cash markets took the news in stride as it appears the Atlantic basin has enough supply available to fill in the gaps. There is also a sense that the explosions & fire at the refinery only moved up the inevitable closure of that refinery which was already struggling after emerging from bankruptcy last year, handicapped by high operating costs and a lack of favorable crude-buying economics based on its location.
The 12 million barrel drop in crude stocks was the largest weekly decline in nearly 3 years. Domestic production dropped for a 3rd consecutive week, the first such stretch of declines since the last price collapse.
The large decrease can largely be explained by a sharp decline in oil imports along with a strong increase in exports – which reached a new record high of 3.77 million barrels/day last week - making it more likely that we’ll see a correction in the next couple of weeks.
It’s not just oil exports that had a big week, both gasoline and diesel exports saw large increases as refinery production ramped up. Those export figures can go a long way to explaining why the market reaction to the PES news hasn’t been more dramatic, since the US is already producing more refined products than it can consume, this situation becomes one of logistics (shifting Gulf Coast exports to the East Coast) rather than capacity.
Speaking of which, the first two charts below show the historical refinery run rates for PADD 1 (East Coast) and total US, before and after the PES closure. As you can see, there will be a dramatic impact on the East Coast run rates, but the US total hardly changes since the Gulf Coast already produced roughly 10X the products as the East. In addition, the US had added 220mb of refining capacity in the past year, which would cover most of the expected decrease from this plant being shuttered.
So, where to from here? With OPEC and G20 meetings coming in the next week, it seems like we’re due for some sideways trading as the market goes into a short-term “wait and see” mode.
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Energy 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.