Energy Bulls Pass Big Test With Flying Colors
The energy bulls passed their first big test in 3 months with flying colors this week, bouncing off of trend support early Thursday morning, then extending those gains later in the day following a bullish report from the DOE, and keeping that momentum going this morning. Big draws in oil and gasoline inventories, and an all-time record for gasoline demand estimates, highlighted the DOE’s weekly report, and sent prices on an immediate rally that was able to sustain through the afternoon and the overnight session.
The EIA’s total petroleum “demand” estimate surpassed 21 million barrels/day last week, a new high since the start of the pandemic, and higher than we were at this point in 2019. That surge was led by a 10% spike in gasoline demand, which reached its highest weekly level in 30 years of data provided from the DOE. While the 4-week average (which is deemed much more reliable than the weekly number) is still trailing pre-pandemic levels, that spike north of 10 million barrels/day (the first time that’s ever happened) is a signal that US consumers are ready to move. We are likely to see a dose of reality next week as the post-holiday hangover has hit demand across the country, and the rain Elsa is dumping along the east coast likely is keeping cars off the road this week. Diesel demand estimates slipped on the week, but remain above both their 5 year average and 2019 levels for this time of year.
Refiners look to be up to the challenge of surging demand, raising gasoline output north of 10.5 million barrels/day for just a 3rd time ever, even though total run rates remain well below where we’d expect them this time of year, and 5% of capacity going away permanently over the past year. That said, as the wide spread in rack prices across the country shows, just because refiners can produce enough fuel in total to continue outpacing US consumption, that doesn’t mean the pipeline network is equipped to get that fuel where it needs to be, particularly in the Western half of the country.
US Oil production did rise to 11.3 million barrels/day, another post-pandemic high. A WSJ article today suggests that American frackers are showing restraint with prices near 6 year highs, choosing to pay off debts rather than plow money into more drilling. While that sounds interesting, for an industry that does not do moderation, it seems like the supply-chain shortages being dealt with in so many industries may be a bigger factor. It will be interesting to see if we get a few more months of prices in the $70s, if the group long known as wildcatters will still be restrained.
If you need some weekend reading material (or are having trouble sleeping) check out BP’s annual world energy statistical review. The report highlights the record setting extremes we witnessed in 2020, details the progress the world is making on renewable energy sources, and notes why those efforts still fall far short of what would be needed to become carbon neutral.
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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.