Energy Markets Trying To Figure Out Potential Impacts Of A Major Hurricane

Market TalkTuesday, Oct 9 2018
Energy Markets Trying To Figure Out Potential Impacts Of  A Major Hurricane

It’s already been a volatile week of trading and it’s only Tuesday morning. Equity markets around the world are being roiled by trade concerns and rising interest rates, while energy markets are trying to figure out the potential impacts of a major hurricane and refinery fire.

After dropping nearly 2% to start the week, refined products rallied back to positive levels as news broke of an explosion and fire at Irving Oil’s 320mb/day refinery in St. John New Brunswick, Canada’s largest refinery, which is a major supplier of gasoline and diesel to the East Coast.

It’s unclear yet what impact that may have on fuel supplies and prices as it’s still unclear which units were effected, and how long they may be out of service. New York harbor basis values largely shrugged off the news since the largest units at the plant were already off-line for scheduled maintenance.

As the charts below show, New England (PADD 1A) may see the most impact from any downtime at the Irving refinery given its proximity to the refinery, relatively small size (only 7% of total PADD 1 gasoline stocks) and starting inventory levels that are within their seasonal range, albeit at the top end. PADDs 1B & 1C meanwhile are well above their previous 5 year ranges for gasoline inventories, and given their larger total capacity, which could explain the muted reaction in the NY Harbor trading hub.

While the East Coast of Canada was dealing with the shock of a major refinery issue, Western Canadian crude oil prices traded down to the $30/barrel mark for the first time since December 2016 as refinery maintenance in the US and a lack of pipeline capacity forces prices to record discounts of nearly $45/barrel to WTI and $55 less than Brent. For perspective, the last time WCS was trading at $30, WTI was at $44 and Brent was at $45, compared to $74 and $85 today.

Hurricane Michael is now a Category 2 storm, and is expected to become a Category 3 storm before making landfall along the Florida panhandle Wednesday. While several off-shore oil rigs have been evacuated as a precaution as the storm nears, its path keeps it far enough east that it should not have a lasting impact on energy supply infrastructure. The storm could have a larger impact on demand as it targets Florida, Georgia, and perhaps some areas of the Carolinas still recovering from Hurricane Florence.

The IEA continued with its series of analytical reports focusing on “blind spots” in the global energy system with a report on renewables Monday. The report estimated that renewables would account for 40% of total global energy consumption growth in the next 5 years, and while Solar capacity will see the largest increases, biofuels will remain the largest segment of renewable energy supply.

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The DOE Report Sparked A Solid Rally In Energy Futures Thursday, But That Upward Momentum Proved Short-Lived

The DOE report sparked a solid rally in energy futures Thursday, but that upward momentum proved short-lived as prices gave back those gains overnight, despite US equity markets surging to all-time highs.

The weekly inventory report showed US refiners are struggling to come back online from a busy maintenance season that was further complicated by January’s cold snap and the unexpected shut down at BP Whiting. Refinery utilization held near 80% on the week, which helped pull gasoline inventories lower despite sluggish demand and a surge in imports along the East Coast. Diesel demand showed a big recovery from last week’s ugly estimate, and when you factor in the missing 4-5% that doesn’t show up due to RD not being included in the reports, actual consumption looks much healthier than the report suggests.

Based on reports of restarts at several major refineries this week, we should see those utilization numbers pick up in next week’s report.

The EPA Thursday approved year-round E15 sales in 8 corn-growing states, despite the fact that the extra ethanol blends have been shown more to pollute more in the warm times of the year. The effective date was pushed back a year however in a show of election-year tight rope walking, which the EPA couched as ensuring that the move wouldn’t lead to a spike in fuel prices this summer.

Of course, the law of unintended consequences may soon be at play in a region that tends to be long gasoline supply for large parts of the year. Removing 5% of the gasoline demand could be another nail in some of the smaller/less complex refineries’ coffins, which would of course make fuel supply less secure, which contradicts one of the main arguments for making more 198 proof grain alcohol and selling it as fuel. Ethanol prices meanwhile continue to slump to multi-year lows this week as low corn prices continue to push unusually high production, and the delayed effective date of this ruling won’t help that.

While Nvidia’s chip mania is getting much of the credit for the surge in equity prices this week, there was also good news for many more companies in reports that the SEC was planning to drop its requirements on Scope 3 emissions reporting which is particularly useful since most people still can’t figure out what exactly scope 3 emissions really are.

In today’s segment of you can’t make this stuff up: The case of chivalry gone wrong with the BP/TA acquisition, and a ketchup caddy company caught spoofing electric capacity.


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

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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.