Major Escalation In Middle Eastern Tensions Seems To Be Outweighing The Bearish Inventory Data

Market TalkThursday, Jan 11 2024
Pivotal Week For Price Action

Energy futures are off to another strong start Thursday, as a major escalation in Middle Eastern tensions seems to be outweighing the bearish inventory data that sent prices tumbling on Wednesday.

Today is the 8th trading session of the new year, and the Red Green pattern for ULSD continues to hold with each day so far bringing an alternating result. We thought the pattern was breaking Wednesday when ULSD started out with big early gains after a strong Tuesday showing, but the nickel rally turned into nickel losses following a bearish DOE report that showed swelling US inventories despite lower refinery runs.

Despite the 10-cent reversal lower Wednesday, ULSD managed a higher high and higher low on its daily bar chart, keeping the technical door open for it to continue higher (just like we’re seeing this morning) and ultimately completing the short-term W pattern by hitting at least $2.80, with a strong argument that we could make a run at the $3 mark in the next few weeks.

Iranian forces seized an oil tanker off the coast of Oman overnight, which brings the Strait of Hormuz into the spreading violence in the region and will most likely force a larger US naval presence to keep products flowing.

Here’s the catch: This tanker wasn’t a random ship moving through the world’s busiest oil transport lane, it’s a ship that was at the center of a US/Iran dispute over sanctioned oil last year. It’s unclear whether or not the ship was specifically targeted for that reason, or if it was just an unhappy coincidence for the operators. What is clear is that the ship has been moved into Iranian waters this morning, which is sure to raise tensions in the region.

This latest attack happened just about a hundred miles to the south and east of the Strait of Hormuz, which is the oil market’s busiest chokepoint. Given the long term issues with the Panama Canal’s lack of water (which doesn’t have a short term solution), the Suez Canal being avoided by many due to the Houthi Attacks in the Red Sea, and now this latest attack, 3 of the world’s 4 busiest shipping lanes are now embroiled in some fashion, and the 4th seems like it could be vulnerable if China decides the distractions elsewhere in the world make this an ideal time to take it’s shot at conquering its neighbors.

The bearish DOE figures overshadowed the shutdown of Delta/Monroe’s PA refinery due to storm-related power outages that caused immediate product allocations across the region and many suppliers to make double digit price increases during the morning hours.  Meanwhile, the P66 Bayway refinery is still recovering after an upset last week, which would probably be more problematic for consumers in the region if the weather wasn’t also significantly hampering demand. 

The DOE has made no secret that it’s been struggling with its weekly petroleum accounting, making changes to its processes last year to try and improve the accuracy of its reports.  Those efforts have been largely focused on oil figures, but this past week suggests there may be some challenges in the refined product space as well. The DOE claims that refiners reduced run rates, and that refined product demand recovered sharply after the Holiday Hangover, and yet both gasoline and diesel saw a 2nd straight week of huge inventory builds.   Import/Export flows can’t explain the difference, so we may have to chalk this up to either another accounting glitch, or perhaps the reality that the data provided the prior 2 Friday’s (when refiners and terminal operators have to submit their data) were both go-home-early days and the numbers reported may not have been the most accurate.

Despite the collapse in gasoline margins over the past few months, and the slowdown last week, US refiners are producing more to start the year since we’ve seen since the start of COVID. That output is pushing total US inventories to multi-year highs, but the distribution of those stocks varies greatly across the country. Most notably, the middle of the country is facing a glut of supply, while coastal markets are still holding below average thanks to their exporting capabilities. East Coast diesel continues to look the most vulnerable to a supply disruption with inventories continuing to sit on the bottom end of their seasonal range despite the recent builds, while West Coast inventories continue to be understated due to the lack of reporting on Renewable Diesel in the weekly stats. 

A deal made in Dallas. Sunoco is selling 200 convenience stores to 7-11 for $1 billion. The proceeds of that sale are apparently being used by Sunoco to increase their European terminal footprint in an effort to diversify their supply options on the East Coast.

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

Market Talk Update 1.11.2024

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RBOB And ULSD Futures Down Around 2.5 Cents After A Mixed Performance Wednesday

Refined products are leading the energy complex lower to start Thursday’s trading with both RBOB and ULSD futures down around 2.5 cents after a mixed performance Wednesday.

The API reported another large build in crude oil inventories last week, with inventories up more than 7 million barrels while gasoline inventories increased by 415,000 barrels and diesel stocks dropped by 2.9 million. The crude oil build was no doubt aided once again by the shutdown of BP’s Whiting refinery that takes nearly ½ million barrels/day of oil demand out of the market. That facility is said to be ramping up operations this week, while full run rates aren’t expected again until March. The DOE’s weekly report will be out at 11am eastern this morning.

Too much or not enough? Tuesday there were reports that the KM pipeline system in California was forced to shut down two-line segments and cut batches in a third due to a lack of storage capacity as heavy rains have sapped demand in the region. Wednesday there were new reports that some products ran out of renewable diesel because of those pipeline delays, bringing back memories of the early COVID lockdown days when an excess of gasoline caused numerous outages of diesel.

The Panama Canal Authority has announced $8.5 billion in sustainability investments planned for the next 5 years. Most of those funds are aimed at sustainability efforts like modernizing equipment and installing solar panels, while around $2 billion is intended for a better water management system to combat the challenges they’ve faced with lower water levels restricting transit by 50% or more in the past year. More importantly in the near term, forecasts for the end of the El Nino pattern that contributed to a record drought, and the beginning of a La Nina pattern that tends to bring more rain to the region are expected to help improve water levels starting this summer.

The bad news is that La Nina pattern, coupled with historically warm water temperature has Accuweather forecasters sounding “Alarm Bells” over a “supercharged” hurricane season this year. Other years with a similar La Nina were 2005 which produced Katrina, Rita and Wilma and 2020 when we ran out of names, and the gulf Coast was repeatedly pummeled but markets didn’t react much due to the COVID demand slump. Perhaps most concerning for the refining industry is that unlike the past couple of years when Florida had the bullseye, the Texas coast is forecast to be at higher risk this year.

RIN prices continued their slide Wednesday morning, trading down to 38 cents/RIN before finally finding a bid that pushed values back to the 41-42 cent range by the end of the day.

The huge slide in RIN values showed up as a benefit in Suncor’s Q4 earnings report this morning, as the Renewable Volume Obligation for the company dropped to $4.75/barrel vs $8.55/barrel in Q4 of 2022. Based on the continued drop so far in 2024, expect that obligation to be nearly cut in half again. Suncor continued the trend of pretty much every other refiner this quarter, showing a dramatic drop in margins from the record-setting levels in 2022, but unlike a few of its counterparts over the past week was able to maintain positive earnings. The company noted an increase in refining runs after recovering from the Christmas Eve blizzard in 2022 that took down its Denver facility for months but did not mention any of the environmental challenges that facility is facing.

Valero’s McKee refinery reported a flaring event Wednesday that impacted multiple unites and lasted almost 24 hours. Meanwhile, Total reported more flaring at its Pt Arthur facility as that plant continues to struggle through restart after being knocked offline by the January deep freeze.

Speaking of which, the US Chemical Safety board released an update on its investigation into the fire at Marathon’s Martinez CA renewable diesel plant last November, noting how the complications of start -up leave refineries of all types vulnerable.

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

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Market TalkWednesday, Feb 21 2024

It’s A Mixed Start For Energy Markets To Start Wednesday’s Session After A Heavy Round Of Selling Tuesday

It’s a mixed start for energy markets to start Wednesday’s session after a heavy round of selling Tuesday. RBOB gasoline futures are clinging to modest gains in the early going while the rest of the complex is moving lower.  

WTI is pulling back for a 2nd day after reaching a 3.5 month high just shy of $80. The pullback pushes prompt values back below the 200-day moving average, reducing the likelihood of a breakout to the upside near term.

ULSD values are down nearly 10 cents for the week and are down more than 26 cents from the high trade set February 9th. That pullback leaves ULSD in neutral territory and could act as a headwind for gasoline prices that still seem poised to at least attempt a typical spring rally that adds roughly 20-30% from winter values.

RIN prices continue their slide this week, with D6 and D4 values reaching new 4-year lows around $.41/RIN Tuesday, which is down just slightly from the $1.62/RIN they were going for a year ago.

HF Sinclair reported a loss for Q4 this morning, with its refining and renewables segments each losing roughly $75 million for the quarter. The change from a year ago in the refining segment is a harsh reminder of the cyclical nature of the business as earnings dropped more than $800 million year on year, with inventory cost adjustments accounting for roughly ¼ of that decline.   

While it wasn’t mentioned in the press release, HFS has the most direct exposure to New Mexico’s recent approval of a clean fuel standard that will start in 2026. That law will no doubt help the company’s struggling Renewables assets in the state but will also create extra costs for their traditional refining operations.

The EIA this morning noted that conditions in the Panama Canal improved slightly in January, allowing Gulf Coast exports to Asia, primarily of Propane and ethane, to increase. While transit capacity is still far below levels we saw before the drought reduced operations in the canal, any improvement offers welcome relief to shippers as they can avoid going the long-way around to avoid the violence in the Red Sea.

France’s navy didn’t waste any time getting into the Red Sea action, shooting down a pair of Houthi Drones less than a day after joining the EU’s official mission to assist in clearing the shipping lanes. It’s not yet clear whether this marks the first official military victory by the French since Napoleon. 

Reminder that the weekly inventory reports are delayed a day due to the holiday Monday.

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