Energy Complex Moves Back Into Neutral Territory

Market TalkTuesday, Sep 29 2020
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It’s another quiet start as September trading winds down, with refined products taking a small step back after four straight days of gains. 

The September recovery bounce after testing the summer lows early in the month has moved the energy complex back into neutral territory on the daily and weekly charts, while the monthly charts still show more downside risk as winter approaches. Monday’s rally in gasoline highlights the complicated challenge for refiners as gasoline inventories have now returned to normal levels, while a glut of distillates remains.

The EIA Monday reported that despite the COVID-related slowdowns in gasoline, diesel and jet fuel exports, the U.S. still sent more petroleum products overseas in the first half of 2020 compared to 2019 thanks to continued growth in Propane and other HGL deliveries, primarily to Asia. While those various liquids – which are mainly a byproduct of oil and natural gas drilling – have numerous uses, the growth in demand from overseas is believed to be primarily driven by production of plastics and other industrial uses, rather than transportation fuels.

The American Trucking Association is forecasting a strong recovery in trucking activity after an unprecedented decline this year in its annual freight forecast. The report estimates a rebound of nearly five percent in trucking volumes next year, then an average growth of 3.2 percent for the following five years. If that report comes to fruition it will be welcome news to U.S. refiners struggling to find a home for their distillate streams.

As various green transition programs are becoming more mainstream in the oil industry, Rosneft is warning that the industry risks another supply and price shock on the back side of the pandemic due to lack of investment in traditional resources. The FT article notes: The 100m barrel a day pre-pandemic oil market required 3m-5m b/d of new supplies to be found each year just to keep up with depletion at existing fields.

While there’s been plenty of refinery closure and project cancellation announcements lately, the refinery formerly known as Hovensa initiated start-up of the plant in the past week, after years of delays. The company planning a new build refinery in North Dakota meanwhile is detailing some of its cutting edge technology, including using corn oil to back out some crude oil, that will make its facility the “greenest” in the U.S., which they believe will offset its limited scale.

In other non-traditional refinery news, Tesla is reportedly building a lithium hydroxide refinery in Texas, adjacent to the facility that will produce its electric-powered trucks. The move to control some of the upstream pieces of its battery production sheds light on just how complex the process of harnessing electricity on a commercial scale really is.

The EPA is challenging the idea California’s governor laid out to ban gasoline-powered-car sales in the state starting in 2035, suggesting the target (which still has to have implementation goals set by the CARB) may be illegal in addition to being impractical.

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

TACenergy MarketTalk 092920

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The Recovery Rally In Energy Markets Continues For A 3rd Day

The recovery rally in energy markets continues for a 3rd day with refined product futures both up more than a dime off of the multi-month lows we saw Wednesday morning. The DJIA broke 40,000 for the first time ever Thursday, and while it pulled back yesterday, US equity futures are suggesting the market will open north of that mark this morning, adding to the sends of optimism in the market.

Despite the bounce in the back half of the week, the weekly charts for both RBOB and ULSD are still painting a bearish outlook with a lower high and lower low set this week unless the early rally this morning can pick up steam in the afternoon. It does seem like the cycle of liquidation from hedge funds has ended however, so it would appear to be less likely that we’ll see another test of technical support near term after this bounce.

Ukraine hit another Russian refinery with a drone strike overnight, sparking a fire at Rosneft’s 240mb/day Tuapse facility on the black sea. That plant was one of the first to be struck by Ukrainian drones back in January and had just completed repairs from that strike in April. The attack was just one part of the largest drone attack to date on Russian energy infrastructure overnight, with more than 100 drones targeting power plants, fuel terminals and two different ports on the Black Sea. I guess that means Ukraine continues to politely ignore the White House request to stop blowing up energy infrastructure in Russia.

Elsewhere in the world where lots of things are being blown up: Several reports of a drone attack in Israel’s largest refining complex (just under 200kbd) made the rounds Thursday, although it remains unclear how much of that is propaganda by the attackers and if any impact was made on production.

The LA market had 2 different refinery upsets Thursday. Marathon reported an upset at the Carson section of its Los Angeles refinery in the morning (the Carson facility was combined with the Wilmington refinery in 2019 and now reports as a single unit to the state, but separately to the AQMD) and Chevron noted a “planned” flaring event Thursday afternoon. Diesel basis values in the region jumped 6 cents during the day. Chicago diesel basis also staged a recovery rally after differentials dropped past a 30 cent discount to futures earlier in the week, pushing wholesale values briefly below $2.10/gallon.

So far there haven’t been any reports of refinery disruptions from the severe weather than swept across the Houston area Thursday. Valero did report a weather-related upset at its Mckee refinery in the TX panhandle, although it appears they avoided having to take any units offline due to that event.

The Panama Canal Authority announced it was increasing its daily ship transit level to 31 from 24 as water levels in the region have recovered following more than a year of restrictions. That’s still lower than the 39 ships/day rate at the peak in 2021, but far better than the low of 18 ships per day that choked transit last year.

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

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Energy Prices Found A Temporary Floor After Hitting New Multi-Month Lows Wednesday

Energy prices found a temporary floor after hitting new multi-month lows Wednesday morning as a rally to record highs in US equity markets and a modestly bullish DOE report both seemed to encourage buyers to step back into the ring.

RBOB and ULSD futures both bounced more than 6 cents off of their morning lows, following a CPI report that eased inflation fears and boosted hopes for the stock market’s obsession of the FED cutting interest rates. Even though the correlation between energy prices and equities and currencies has been weak lately, the spillover effect on the bidding was clear from the timing of the moves Wednesday.

The DOE’s weekly report seemed to add to the optimism seen in equity markets as healthy increases in the government’s demand estimates kept product inventories from building despite increased refinery runs.

PADD 3 diesel stocks dropped after large increases in each of the past 3 weeks pushed inventories from the low end of their seasonal range to average levels. PADD 2 inventories remain well above average which helps explain the slump in mid-continent basis values over the past week. Diesel demand showed a nice recovery on the week and would actually be above the 5 year average if the 5% or so of US consumption that’s transitioned to RD was included in these figures.

Gasoline inventories are following typical seasonal patterns except on the West Coast where a surge in imports helped inventories recover for a 3rd straight week following April’s big basis rally.

Refiners for the most part are also following the seasonal script, ramping up output as we approach the peak driving demand season which unofficially kicks off in 10 days. PADD 2 refiners didn’t seem to be learning any lessons from last year’s basis collapse and rapidly increased run rates last week, which is another contributor to the weakness in midwestern cash markets. One difference this year for PADD 2 refiners is the new Transmountain pipeline system has eroded some of their buying advantage for Canadian crude grades, although those spreads so far haven’t shrunk as much as some had feared.

Meanwhile, wildfires are threatening Canada’s largest oil sands hub Ft. McMurray Alberta, and more than 6,000 people have been forced to evacuate the area. So far no production disruptions have been reported, but you may recall that fires in this region shut in more than 1 million barrels/day of production in 2016, which helped oil prices recover from their slump below $30/barrel.

California’s Air Resources Board announced it was indefinitely delaying its latest California Carbon Allowance (CCA) auction – in the middle of the auction - due to technical difficulties, with no word yet from the agency when bidders’ security payments will be returned, which is pretty much a nice microcosm for the entire Cap & Trade program those credits enable.

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

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