Energy Prices Surging As Tropical Storm Gordon Takes Aim At US Gulf Coast

Market TalkTuesday, Sep 4 2018
Energy Prices Surging As Tropical Storm Gordon Takes Aim At US Gulf Coast

Energy prices are surging this morning as Tropical Storm Gordon takes aim at the US Gulf Coast. There are plenty of other reasons for crude to rally today, lower Iranian exports, more chaos in Libya and predictions of shortages in Nigeria, not to mention some US oil platform evacuations, but today’s action seems to be more focused on the potential impacts to refined product supply with roughly 16% of total US refining capacity in the forecast cone of Gordon’s path. ULSD futures have already reached their highest levels since January 2015 in overnight trading.

While this storm is a serious threat, coming much to close for comfort to one of the largest clusters of refineries in the world, it is not expected to be a major hurricane as it makes landfall as either a tropical storm or a category 1 hurricane, unlike Harvey and Irma in 2017 which were both category 4 storms when they reached land.

In addition to the lower strength than what we saw a year ago, current forecasts show the center of the storm staying east of the critical refinery cluster along the Mississippi river from Baton Rouge to New Orleans, which is good news for refined product supplies as the west side of these storms gets significantly less storm surge due to their rotation. The further east the storm stays the better for oil production as well as it will impact fewer offshore platforms in the Gulf of Mexico as you can see in the maps below from the EIA. By this time tomorrow we should have a better feel for any supply disruptions which will likely be the difference in today’s gains going away, or being just the beginning of much higher September prices.

In other news, managed funds added to their net length (increase their bets on higher prices) across the board in petroleum contracts last week, not surprising given the strong bounce in prices we saw to end the month. Baker Hughes reported 2 more oil rigs were put to work last week after dropping by 9 the week prior.

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Most Energy Contracts Are Ticking Lower For A 2nd Day After A Trickle Of Selling Picked Up Steam Tuesday

Most energy contracts are ticking lower for a 2nd day after a trickle of selling picked up steam Tuesday. ULSD futures are down a dime from Monday’s highs and RBOB futures are down 7 cents.

Diesel prices continue to look like the weak link in the energy chain, with futures coming within 1 point of their March lows overnight, setting up a test of the December lows around $2.48 if that resistance breaks down. Despite yesterday’s slide, RBOB futures still look bullish on the weekly charts, with a run towards the $3 mark still looking like a strong possibility in the next month or so.

The API reported crude stocks increased by more than 9 million barrels last week, while distillates were up 531,000 and gasoline stocks continued their seasonal decline falling by 4.4 million barrels. The DOE’s weekly report is due out at its normal time this morning.

RIN values have recovered to their highest levels in 2 months around $.59/RIN for D4 and D6 RINs, even though the recovery rally in corn and soybean prices that had helped lift prices off of the 4 year lows set in February has stalled out. Expectations for more biofuel production to be shut in due to weak economics with lower subsidy values seems to be encouraging the tick higher in recent weeks, although prices are still about $1/RIN lower than this time last year.

Reminder that Friday is one of only 3 annual holidays in which the Nymex is completely shut, so no prices will be published, but it’s not a federal holiday in the US so banks will be open.

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Refined Products Seeing Small Losses Of Around A Penny While Crude Oil Contracts Hover Just Above Break Even

Energy futures are taking a breather to start Tuesday’s trading, with refined products seeing small losses of around a penny while crude oil contracts hover just above break even.

No new news on either the Red Sea shipping or Russian Refining attacks this morning, so Cocoa prices seem to be taking over the commodity headlines while energy markets wait on their next big move.

RBOB gasoline futures set a new 6-month high Monday at $2.7711, which leaves the door open on the weekly charts for the spring rally to continue. A run at the $3 mark is certainly possible in the next few weeks before the typical seasonal price peak is set just before the start of driving season.

A container ship lost power and crashed into the Francis Scott Key bridge in Baltimore this morning, causing a devastating collapse. While cargo shipping into the area will no doubt be impacted by this event, fuel supplies are unlikely to see any notable change since the 9 fuel terminals in Baltimore are primarily supplied by Colonial pipeline. Barges from Philadelphia refineries do supplement Baltimore supplies at times, and those vessel flows will be impacted at least until rescue operations are completed and the bridge sections removed from the waterway. That said, since shipping up from the Gulf Coast via Colonial is generally cheaper than shipping an NY Harbor-priced barrel south, the amount of supply disrupted by this event will be minimal.

While we’re still waiting on the official forecasts for the Atlantic Hurricane season, early reports continue to suggest that we could be in for a very busy year due to warm water temperatures and a forming La Nina pattern.

Dallas meanwhile is preparing for a different sort of disruption, with city officials encouraging companies to let employees work from home during the solar eclipse on April 8th as metroplex traffic is expected to surge. While some isolated fuel outages are certainly possible if people start panic buying gasoline they don’t need, there’s no reason to expect any widespread impact from the demand spike.

Today’s interesting read: Why AI requires a staggering amount of electricity and may create supply competition for EVs that will end up benefitting fossil fuels.

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