Energy Markets Are Off To Another Quiet Start Thursday

Market TalkThursday, Nov 3 2022
Pivotal Week For Price Action

Energy markets are off to another quiet start Thursday with modest losses in the early going after some bullish data points from the DOE helped push prices higher on Wednesday.

Stock markets have reacted negatively to the FOMC chair’s press conference Wednesday in which he made it clear that a pivot is not coming and that rates will go higher than previously expected to stomp out inflation. The correlation between daily moves in equity and energy prices has ticked higher in the past couple of weeks so some of that negative outlook seems to be spilling over into the energy arena as well. 

Coastal Extremes: While the East Coast has received plenty of attention for tight diesel supplies (and a particular panicked supplier’s color coding) over the past few weeks, and ULSD basis values in NYH are north of 80 cents over December futures, the West Coast is seeing the opposite phenomenon as diesel basis values plummeted to a 50 cent discount Wednesday.   Less than a month ago we saw LA spots at a 50 cent premium to November futures, that set cash prices above $4.55/gallon vs values around $3.20 this morning. Will we see a similar drop in East Coast values over the next month?

PADD 1 (East Coast) refining rates actually surpassed 100% of nameplate capacity last week, reaching the highest run rates since the PES refinery exploded and shut down in 2019. You may be wondering how refineries can physically run above 100% of capacity, and the simple answer is it’s just like football players giving 110% on every play. Actually, the reason is that when PBF shut units at its Paulsboro refinery at the end of 2020 to try and survive the brutal demand environment that knocked several refineries out of business, 70mb/day of refining capacity was taken off the DOE’s ledger, but hasn’t yet been added back now that those units have restarted.  Given the tight state of supplies in PADD 1, that incremental production could not come at a better time, and helps explain how that particular refiner went from knocking on the door of insolvency 2 years ago, to making more than $1 billion last quarter.

Demand is bad, supply is worse: US gasoline stocks dropped to an 8 year low last week, and soft demand that remains near levels we saw in 2020 may be the only thing preventing widespread outages as a result. 

Total US gasoline imports dropped to their lowest levels of the year, led by a big decline in PADD 1 imports caused by a combination of a temporarily closed arb window from Europe during the French refinery strikes, refinery maintenance at a Canadian refinery that’s a major supplier to the region, and various vessel delays. That drop in imports was a key driver in the various short term outages plaguing terminals across the region in the past few weeks, and if we don’t see a recovery in those imports soon, expect those shortages to continue.   Then again, the next few months are typically the slowest period for imports as US driving demand slows, and gasoline supply increases thanks to the butane blending that’s becoming more prevalent across the country, so we may not see as big of a snap back as we would if this drop had happened 2 months ago.

The diesel import/export flow also continues to have an outsized influence on prices. We did see diesel exports decline last week, and PADD 1 imports start to tick higher in what could be the early wave reacting to the $1/gallon premiums for diesel in the region, both of which helped inventories increase modestly, although days of supply still ticked lower thanks to a healthy increase in the DOE’s demand estimate. Note the drop in PADD 5 diesel imports below as the market reacts just as strongly to the drop in West Coast basis values as it did to the spike in September. The billion dollar question for the months ahead is whether or not the Atlantic basin is capable of that type of a reaction to the high prices in New York. 

Hurricane Lisa made Landfall over Belize Wednesday, and most models now have the storm emerging in the Gulf of Mexico tomorrow after crossing the Yucatan peninsula. Those models don’t currently have the storm redeveloping into a hurricane as it approaches refinery row, but it will need to be watched for another few days. Meanwhile Martin has also reached Hurricane status as it churns through the North Atlantic, far from being a threat to land, and the NHC is tracking two more potential systems off the SE US that are given low odds of being named.

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

Market Talk Update 11.03.22

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Pivotal Week For Price Action
Market TalkThursday, Dec 1 2022

December Trading Is Kicking Off With Modest Gains For Energy Contracts

December trading is kicking off with modest gains for energy contracts after a strong finish to November helped the complex avoid a technical breakdown.  

Equity markets saw another big rally Wednesday after the FED chair suggested that smaller rate hikes were coming. The correlation between energy and equity markets remains weak, so it doesn’t seem like that’s having much influence on daily pricing, but it certainly doesn’t hurt the case for a recovery rally.  New reports that China may ease some lockdowns in the wake of last weekend’s protests is also getting some credit for the strength in prices after they reached 11 month lows on Monday.

The DOE’s weekly report had something for everyone with crude oil stocks showing some bullish figures while refined product supplies got some much-needed relief.

US Crude oil inventories saw a huge drop of more than 12 million barrels last week thanks to a surge in exports to the 3rd highest level on record, a drop in imports, and the SPR sales that have been supplementing commercial supplies for the past 6 months wind down. The market reaction was fairly muted to the big headline drop, which is probably due to the inconsistent nature of the import/export flows, which are likely to reverse course next week. The lack of SPR injections will be a key figure to watch through the winter, particularly as the Russian embargo starts next week.

Diesel inventories increases across all 5 PADDs last week, as demand dipped again and imports ticked higher. Diesel exports remain above average, and are expected to continue that pace in the near term as European and Latin American buyers continue to be short. Read this note for why in the long term more of those supplies will probably come from China or Kuwait

US refiners continue to run all-out, with total throughput last week reaching its highest level since the start of the pandemic, even though we’ve lost more than 600,000 barrels/day of capacity since then. Those high run rates at a time of soft demand help explain why we’re seeing big negative basis values at the refining hubs around the country and if the pipeline and vessel outlets can’t keep pace to move that product elsewhere we may see those refiners forced to cut back due to lack of storage options.

The EPA was required by court order to submit its plans for the renewable fuel standard by November 16, and then came to an agreement to release them on November 30, and then apparently decided to meet that deadline, but not release the plan to the public. If you think this is ridiculous, you’re not alone, but keep in mind this is the same agency that regularly missed the statutory deadline by more than a year previously, so it’s also not too surprising. This is also the law that required 16 billion gallons/year of cellulosic biofuels be blended by 2022 when it was put into place 15 years ago, only to run into a wall of physical reality where the country is still unable to produce even 1 billion gallons/year of that fuel. 

There are still expectations that the public may get to see the proposed rulings later this week, and reports that renewable electricity generation will be added to the mix for the first time ever starting next year. RIN prices were pulling back from the 18 month highs they reached leading up to the non-announcement as it seems the addition of “eRINs” will add new RIN supply, and potentially offset the increased biofuel mandates.

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, Nov 30 2022

Energy Markets Are Seeing A Strong Rally For A 2nd Day

Energy markets are seeing a strong rally for a 2nd day as uncertainty about the upcoming OPEC meeting and about the looming Russian oil embargo seem to have markets focusing on supply fears again, after weeks of demand-fears driving prices lower. Diesel prices are up more than 22 cents from yesterday’s low trade, while gasoline prices are up 12. The bounce puts the complex back in neutral technical territory after surviving a trip to the edge of a breakdown that could have sent prices sharply lower. 

Concerns about a pending recession continue to plague equity markets as the US Treasury yield curve is inverted to a degree we’ve only seen a couple of times in the past 25 years. As the chart below shows, these inversions have been a good indicator of a pending economic slowdown. Energy markets seem to already have gotten that selling out of their system in the short term, but this could once again become a factor if this latest rally runs out of steam. 

The European Union still can’t unite on a price cap agreement for Russian oil, less than a week before an embargo on Russian oil is set to begin. Both WTI and Brent crude have slipped into a Contango price curve near term as current supplies are proving ample as traders have had months to prepare for this change, and demand has softened globally. 

Meanwhile, Italian officials continue to race to find a way to keep their Sicilian refinery in operation after the embargo begins, asking the US to provide banks assurance that they won’t face fines for breaching sanctions given the Russian-owned status of that plant. Since the US is a consistent buyer of products from that facility, and the East Coast continues to struggle to find enough supply, perhaps it’s an offer they can’t refuse. 

OPEC and friends have decided to hold their upcoming meeting virtually, which some are taking as a sign that they will roll over their output cut agreement from October. 

The tornado outbreak in the southern US looks like it stayed far enough away from the Gulf Coast to spare the refineries in the area. The Alon refinery in Big Spring TX reported an operational issue that lasted more than 16 hours Monday, that ENT is reporting could end up causing extended downtime at that facility. While that plant is far from the Gulf Coast trading hub, downtime could add to the supply challenges to West Texas and surrounding markets.

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

Pivotal Week For Price Action
Market TalkWednesday, Nov 30 2022

Week 48 - US DOE Inventory Recap