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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Gasoline Futures Are Leading The Energy Complex Higher This Morning With 1.5% Gains So Far In Pre-Market Trading
Gasoline futures are leading the energy complex higher this morning with 1.5% gains so far in pre-market trading. Heating oil futures are following close behind, exchanging hands 4.5 cents higher than Friday’s settlement (↑1.3%) while American and European crude oil futures trade modestly higher in sympathy.
The world’s largest oil cartel is scheduled to meet this Wednesday but is unlikely they will alter their supply cuts regimen. The months-long rally in oil prices, however, has some thinking Saudi Arabia might being to ease their incremental, voluntary supply cuts.
Tropical storm Rina has dissolved over the weekend, leaving the relatively tenured Philippe the sole point of focus in the Atlantic storm basin. While he is expected to strengthen into a hurricane by the end of this week, most projections keep Philippe out to sea, with a non-zero percent chance he makes landfall in Nova Scotia or Maine.
Unsurprisingly the CFTC reported a 6.8% increase in money manager net positions in WTI futures last week as speculative bettors piled on their bullish bets. While $100 oil is being shoutedfromeveryrooftop, we’ve yet to see that conviction on the charts: open interest on WTI futures is far below that of the last ~7 years.
Click here to download a PDF of today's TACenergy Market Talk.
The Energy Bulls Are On The Run This Morning, Lead By Heating And Crude Oil Futures
The energy bulls are on the run this morning, lead by heating and crude oil futures. The November HO contract is trading ~7.5 cents per gallon (2.3%) higher while WTI is bumped $1.24 per barrel (1.3%) so far in pre-market trading. Their gasoline counterpart is rallying in sympathy with .3% gains to start the day.
The October contracts for both RBOB and HO expire today, and while trading action looks to be pretty tame so far, it isn’t a rare occurrence to see some big price swings on expiring contracts as traders look to close their positions. It should be noted that the only physical market pricing still pricing their product off of October futures, while the rest of the nation already switched to the November contract over the last week or so.
We’ve now got two named storms in the Atlantic, Philippe and Rina, but both aren’t expected to develop into major storms. While most models show both storms staying out to sea, the European model for weather forecasting shows there is a possibility that Philippe gets close enough to the Northeast to bring rain to the area, but not much else.
The term “$100 oil” is starting to pop up in headlines more and more mostly because WTI settled above the $90 level back on Tuesday, but partially because it’s a nice round number that’s easy to yell in debates or hear about from your father-in-law on the golf course. While the prospect of sustained high energy prices could be harmful to the economy, its important to note that the current short supply environment is voluntary. The spigot could be turned back on at any point, which could topple oil prices in short order.
Click here to download a PDF of today's TACenergy Market Talk.
Gasoline And Crude Oil Futures Are All Trading Between .5% And .8% Lower To Start The Day
The energy complex is sagging this morning with the exception of the distillate benchmark as the prompt month trading higher by about a penny. Gasoline and crude oil futures are all trading between .5% and .8% lower to start the day, pulling back after WTI traded above $95 briefly in the overnight session.
There isn’t much in the way of news this morning with most still citing the expectation for tight global supply, inflation and interest rates, and production cuts by OPEC+.
As reported by the Department of Energy yesterday, refinery runs dropped in all PADDs, except for PADD 3, as we plug along into the fall turnaround season. Crude oil inventories drew down last week, despite lower runs and exports, and increased imports, likely due to the crude oil “adjustment” the EIA uses to reconcile any missing barrels from their calculated estimates.
Diesel remains tight in the US, particularly in PADD 5 (West Coast + Nevada, Arizona) but stockpiles are climbing back towards their 5-year seasonal range. It unsurprising to see a spike in ULSD imports to the region since both Los Angeles and San Francisco spot markets are trading at 50+ cent premiums to the NYMEX. We’ve yet to see such relief on the gasoline side of the barrel, and we likely won’t until the market switches to a higher RVP.