Energy Futures Are Seeing A Big Pullback To Start Thanksgiving Eve Trading

Market TalkWednesday, Nov 23 2022
Pivotal Week For Price Action

Energy futures are seeing a big pullback to start Thanksgiving eve trading, wiping out most of Tuesday’s gains. As traders continue to deal with a daily deluge of dreadful demand headlines from China, offset by uncertainty surrounding supply thanks to OPEC rumors and a plan to cap Russian oil prices that leaves more questions than answers

More refinery problems seem to have contributed to runup in RBOB futures in the early part of the week, although this morning’s pullback suggests the market really isn’t too worried about gasoline supply. Reports that the Irving refinery on the East Coast of Canada was facing challenges restarting after a major fall turnaround and that BP’s plant in Rotterdam was unable to restart due to a strike are both making waves in futures and physical markets, and could be key factors driving trading as we approach the end of November. Meanwhile, Bulgaria announced that it will exempt its refinery owned by Russia’s Lukoil to continue exporting fuels after the EU embargo starts next month, adding yet another loophole to the attempted sanctions on Russian supplies.

Cash markets around most of the US weren’t buying the futures rally Tuesday, with basis values tumbling for both gasoline and diesel. On the West Coast, gasoline basis values have dropped to their lowest levels in 2 years with discounts ranging from 25-30 cents/gallon, just two weeks after trading at a $1/gallon premium to December RBOB futures. New York harbor diesel has completed its return to earth, trading at just a penny premium to December ULSD futures, just two weeks after reaching an all-time high of $1.25/gallon. Gulf Coast distillates continue to get hammered, trading at a 36 cent discount to Dec ULSD, as refiners continue to struggle to find enough transportation to move their product.

An often-overlooked detail in the breathless reporting of diesel shortages is that the US actually produces more than a million barrels/day more diesel than it consumes, with producers relying heavily on the export market to keep their facilities moving at maximum capacity. What seems to be happening lately is that the refinery hubs have plenty of supply as run rates have been maxed out, but pipeline and vessel availability is lacking, forcing huge discounts for generic origin barrels, and big premiums for anyone who has space along the pipelines heading East and West, or a ship that’s not already booked up. A prime example: With New York ULSD now trading close to par with futures, you might think that the price for space along Colonial would collapse, but it’s holding north of 15 cents as Gulf Coast refiners are paying up to find a home for the diesel they want so badly to continue overproducing given current margins. 

The API reported that diesel stocks increased by 1.1 million barrels last week, while gasoline stocks declined by 400,000 barrels. Crude oil stocks declined by more than 4 million barrels, even though the SPR released more than a million barrels on the week, which has helped make that brief contango in WTI prices disappear.  The DOE’s weekly report is due out at its normal time today, with the import/export flows key numbers to watch.

Futures will trade in abbreviated sessions Thursday and Friday but spot markets will not be assessed. Even though many would prefer if nothing happened for the next 4 days, rack prices can and will change over the long holiday weekend, especially if we see a big market move like we did last year. 

RIN values continue to slowly but steadily climb to an 18 month high as the market awaits the EPA’s big announcement on its new plans for the RFS next week. 

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Market Talk Update 11.23.22

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Pivotal Week For Price Action
Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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

Pivotal Week For Price Action
Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

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

Pivotal Week For Price Action
Market TalkWednesday, Apr 10 2024

Week 14 - US DOE Inventory Recap