Energy Markets Starting August Trading With A Thud
Energy markets are starting August trading with a thud, with crude prices down a dollar or more and products down 3-4 cents, as disappointment in the FED seems to be outweighing inventory draws reported by the DOE.
The FED did announce its first interest rate cut in a decade Wednesday, but financial markets threw a small tantrum that it was only 25 points, and perhaps more importantly that the FED chairman said this was not the first of many. That late selling in equities carried over into the energy arena as product prices dropped 1-2 cents post settlement, and that weakness carried through the overnight session. One other reason for concern in the FED’s rate cut: Look at the chart below and note that more often than not, when the FED starts cutting rates, there’s a recession in the not-too-distant future.
Dramatic video of an explosion at the Exxon Baytown refinery – the 3rd largest refinery in the US – had futures and cash markets rallying briefly Wednesday morning. When it was discovered the fire was contained to the chemical plant section of the refinery and that gasoline and diesel production may not be affected however, prices quickly settled back down.
Notable items from the DOE weekly status report:
US crude production bounced back by 900,000 barrels/day last week as rigs shuttered by Hurricane Barry came back online. The total is now just 100,000 barrels from the all-time high.
US petroleum demand estimates dipped on the week, but are holding above their seasonal range. The EIA also announced that electricity demand had reached a two year high this week as a heat wave swept across the US, which could bring some much-needed incremental diesel demand to supplement traditional power generation sources.
A big deal was announced Wednesday when the UK’s EG Group announced its planned acquisition of Cumberland Farms’ C-Store Chain, after buying Kroger’s C-Stores last year. An interesting side note to this story, the British pound has been plunging recently, largely due to Brexit concerns, which means the actual purchase price for the acquirers may be rising rapidly even though the dollar amount isn’t changing.
Two storm systems continue to churn in the Atlantic. The first still looks like a non-event, but the second is now given a 70% chance of developing over the next 5 days. That system – known for now as 96-L – will need to be watched over the next week as there is a window in which it could be steered towards the US.
News & Views
View All
Energy Futures Are Caught Up In Headline Tug-O-War This Morning
Energy futures are caught up in headline tug-o-war this morning with Canadian oil production concerns and a positive US GDP report trying to push prices higher while sinking Chinese demand worries and Gaza ceasefire hopes are applying downward pressure. The latter two seem to be favored more so far this morning with WTI and Brent crude oil futures down ~45 cents per barrel, while gasoline and diesel prices are down about half a cent and two cents, respectively.
No news is good news? Chicago gasoline prices dropped nearly 30 cents yesterday, despite there not being any update on Exxon’s Joliet refinery after further damage was discovered Wednesday. Its tough to say if traders have realized the supply situation isn’t as bad as originally thought or if this historically volatile market is just being itself (aka ‘Chicago being Chicago’).
The rain isn’t letting up along the Texas Gulf Coast today and is forecasted to carry on through the weekend. While much of the greater Houston area is under flood watch, only two refineries are within the (more serious) flood warning area: Marathon’s Galveston Bay and Valero’s Texas City refineries. However, notification that more work is needed at Phillip’s 66 Borger refinery (up in the panhandle) is the only filing we’ve seen come through the TECQ, so far.
Premiums over the tariff on Colonial’s Line 1 (aka linespace value) returned to zero yesterday, and actually traded in the negatives, after its extended run of positive values atypical of this time of year. Line 1’s counterpart, Line 2, which carries distillates from Houston to Greensboro NC, has traded at a discount so far this year, due to the healthy, if not over-, supply of diesel along the eastern seaboard.
Click here to download a PDF of today's TACenergy Market Talk.
WTI And Brent Crude Oil Futures Are Trading ~$1.50 Per Barrel Lower In Pre-Market Trading
The across-the-board drawdown in national energy stockpiles, as reported by the Department of Energy yesterday, stoked bullish sentiment Wednesday and prompt month gasoline, diesel, and crude oil futures published gains on the day. Those gains are being given back this morning.
The surprise rate cut by the People’s Bank of China is being blamed for the selling we are seeing in energy markets this morning. While the interest rate drop in both short- and medium-term loans won’t likely affect energy prices outright, the concern lies in the overall economic health of the world’s second largest economy and crude oil consumer. Prompt month WTI and Brent crude oil futures are trading ~$1.50 per barrel lower in pre-market trading, gasoline and diesel are following suit, shaving off .0400-.0450 per gallon.
Chicagoland RBOB has maintained its 60-cent premium over New York prices through this morning and shows no sign of coming down any time soon. Quite the opposite in fact: the storm damage, which knocked Exxon Mobil’s Joliet refinery offline on 7/15, seems to be more extensive than initially thought, potentially extending the repair time and pushing back the expected return date.
There are three main refineries that feed the Chicago market, the impact from one of them shutting down abruptly can be seen in the charts derived from aforementioned data published by the DOE. Refinery throughput in PADD 2 dropped 183,000 barrels per day, driving gasoline stockpiles in the area down to a new 5-year seasonal low.
While it seems all is quiet on the Atlantic front (for now), America’s Refineryland is forecasted to receive non-stop rain and thunderstorms for the next four days. While it may not be as dramatic as a hurricane, flooding and power outages can shut down refineries, and cities for that matter, all the same, as we learned from Beryl.