Gasoline Futures Plunge, Saudi-Russo Discord Dampens Rally

Market TalkThursday, May 25 2023
Pivotal Week For Price Action

So much for the Memorial Day rally? Gasoline futures are dropping nearly 7 cents/gallon in the early going this morning, leading the energy complex lower, and wiping out the strong gains we saw Wednesday. Diesel prices are down 4 cents so far and are now just a penny away from wiping out their gains for the week. Prices did recover some of their early losses following the Q1 GDP estimate that came in slightly above earlier guesses, and showed the US economy continues to see modest growth despite all of the recession warnings. 

A day after the Saudi Oil minister threatened speculators shorting oil prices, a Russian official downplayed the chances of OPEC & friends agreeing to another output cut at its meeting next week, which seems to have sent some of the bullish bandwagon jumpers back to the sidelines. 

The DOE reported a surge in the estimated demand for gasoline and diesel last week, which pushed inventories to new lows for the year, with gasoline stocks now at their lowest seasonal level in more than 6 years. While the weekly demand estimates are notoriously volatile (aka unreliable) the diesel reading touched its 2nd highest level of the year and offered hope for producers who have been languishing under some of the worst seasonal consumption that we’ve seen in decades.

What a difference a year makes: This time last year distillate cracks were spiking north of $70/barrel, some $25/barrel more than gasoline, incenting refiners to maximize diesel output. This year, gasoline cracks are rallying to a 10-month high and are trading $8/barrel over diesel values. The forward curve still favors diesel output long term and shows profitable run-rates for refiners for the next 2 years, albeit at much more modest levels than the records we’ve seen set over the prior 12 months.

Oil inventories saw a huge decline of more than 12 million barrels last week, despite another SPR release of 1.5 million barrels. The EIA’s adjustment factor was at play again, with a reduction in the fudge factor accounting for 8 million barrels of the drop, while a big decrease in imports accounted for another 7-million-barrel decline last week, while exports held strong north of 4-million barrels/day.

Refinery runs ticked slightly higher for a 2nd week, and continue to hold near year-ago levels, and should continue to ramp up as a busy spring maintenance season comes to an end. The main impediment to seeing refiners reach maximum run rates in June appears to be the rash of fires that have been breaking out lately. It’s not just US refiners that are struggling with fires, multiple refineries in Mexico have had multiple issues in the past week, further complicating the issues we saw back in February when 3 fires broke out on the same day.  

Game change or pipe dream? Plans to build a 250mb/day oil refinery near the WTI delivery hub in Cushing OK were announced this week, with the facility claiming to operate on Hydrogen and Oxygen fuel sources that managers claim will reduce emissions by 95%. IF the project moves forward, construction is scheduled to start in 2024, with the first potential for supply starting in 2027.

The US Treasury published a progress report on the Russian Oil price cap last week, taking a page out of the DOE’s SPR playbook and patting itself on the back for a job well done. A Bloomberg article this morning details how India and China are the main beneficiaries of that plan. 

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Market Talk Update 05.25.2023

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Pivotal Week For Price Action
Market TalkFriday, Jun 21 2024

Charts Continue To Suggest We’re In For A Period Of Sideways Trading

It’s another quiet start for energy markets that seem to have entered the summer doldrums where peak gasoline demand for the year meets peak disinterest as many in the industry start taking vacations. Charts continue to suggest we’re in for a period of sideways trading now that the big June recovery bounce seems to have run out of steam.

Tropical storm Alberto dissipated over Mexico Thursday, but not before its far-stretching thunderstorms upset another refinery in the Corpus Christi area. Flint Hills reported a boiler was knocked offline at its East Corpus refinery, a day after Citgo reported an upset at its East facility as well. Large parts of Texas have been swimming in supply most of the year as neighboring markets to the North and West have been long, backing up barrels into the Lonestar state so these small upsets are unlikely to move the needle in terms of prices or allocations in the area, but they are a good reminder of how vulnerable these facilities are to the weather. The NHC is still tracking 2 more systems with coin-flip odds of being named in the next few days, but neither one looks like it’s headed for the oil production and refining zones in the Gulf Coast at this point.

Ukraine continues to pound Russian energy infrastructure, with 4 different refineries reportedly struck overnight, following attacks on multiple export facilities earlier in the week. The global market continues to largely shrug off the attacks, as excess refining capacity in Asia seems more than capable of picking up any slack in the supply network that may be caused by a loss in Russian output, which is a very stark contrast to what we were experiencing 2 years ago.

Another dip in capacity: The EIA reported a drop of 103mb/day of refining capacity in the US last week, the first reduction in capacity reported since before Russia invaded Ukraine. A general drop in capacity came as no surprise as the conversion of the P66 Rodeo refinery in the San Francisco Bay area earlier this year was well documented. The surprise in the figures was that the East Coast made up 40% of the total decline, which may suggest those facilities which are generally disadvantaged due to labor costs and limitations in crude oil sourcing, are once again knocking on death’s door after a 2-year reprieve.

With the conversion of Rodeo, PADD 5 now has the least amount of refining capacity since the EIA started tracking that stat 40 years ago. Right on cue, the DOE also reported PADD 5 gasoline imports surged to the highest level in over 3 years last week, offering a glimpse of what lays ahead as the region will now be more dependent on shipments from across the Pacific to meet local demand.

Speaking of which, lobbying groups are filing responses to California Energy’s workshop proposals on new refinery rules to cap profits, using the forum to tout the advantages of whatever product they’re selling, and highlighting the risks of the state making itself a fuel island dependent on imports from overseas.

Another one bites the dust? BP “is pressing pause” on its biofuel project at its Cherry Point WA refinery this week, the latest in a line of biofuel producers to rethink plans to make diesel from soybeans and waste oils as subsidies have plunged. On top of plummeting LCFS and RIN values that have cut nearly $2/gallon out of the credit values of the fuel that costs $3-$4/gallon more than traditional diesel, the new Clean Fuel Production Credit is replacing the $1/gallon Blender’s Tax credit that’s been the lifeline to many producers over the past decade. The new program (which is part of the Inflation “Reduction” Act) sets a higher bar to clear before producers can get their handout, which means some domestic facilities will see another loss in credit values from 50-80 cents/gallon vs the BTC, while importers won’t qualify for any credit under the new program.

For real this time? Mexican officials continue to make up stories about when their new Dos Bocas refinery will begin producing fuels, kicking the can further down the road this week saying the facility will start up in the back half of the year. This is at least the 10th time officials have moved back the start date of the facility over the past few years and given that the back half of the year starts in 10 days, I’ll take the over on this bet. Refiners along the US Gulf Coast are no doubt celebrating anytime another delay is announced as they’re facing more competition than they have in the past two decades for their exports.

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 TalkThursday, Jun 20 2024

Week 24 - US DOE Inventory Recap

Market Talk Updates - Social Header
Market TalkThursday, Jun 20 2024

Energy Futures Giving Back Yesterday's Holiday Shortened Session Gains

Energy futures are giving back almost all of the gains made during yesterday’s holiday-shortened session as a search for direction begins to emerge after crude oil and diesel prices reached 7-week highs. Charts suggest we may be in for a few weeks of sideways trading unless buyers can push prices up another 5-10 cents before the month's end.

A reminder that since futures didn’t settle yesterday, the price change you’re seeing today is relative to Tuesday’s close. Spot markets weren’t assessed yesterday. The DOE’s weekly status report will be released at 11 am Eastern.

Tropical storm Alberto was finally named Wednesday after a couple of days of a “potential tropical cyclone” label. While the storm is already moving inland over Mexico, it is having widespread impacts with parts of Texas already declaring states of emergency to deal with flooding.

Yesterday we mentioned that the heavy rains brought by this system may interfere with restart efforts at Citgo’s Corpus Christi West refinery, but it was actually their East Corpus Christi plant that reported flaring due to the “heavy rainfall event.” No units were reported to be shut from that upset, and if the refiners in the area can make it another 12 hours, they’ll have dodged their first storm bullet of the year.

Although the forecasts all said this would be an extremely busy year for storms, Alberto was actually the latest named storm in the Atlantic basin for a season in 10 years. Don’t worry though, it looks like we’ll quickly make up for lost time with two more systems being tracked. One on Alberto’s heels is given 50% odds of being named as it moves into the Gulf of Mexico this weekend, while the other lingering off the SE coast is only given 40% odds, but is still set to bring heavy rain to Florida, Georgia and the Carolinas.

The treasury and IRS published guidance on the Prevailing Wage and Apprenticeship (PWA) requirements for renewable fuel facilities to qualify for the new Clean Fuel Production Credit (CFPC) that will replace the blanket $1/gallon Blender’s Tax Credit next year. Without reaching the PWA standards, producers can get a maximum of $.20/gallon for Biodiesel and RD, and $.35/gallon for SAF. If a producer meets the PWA guidelines, they can theoretically earn 5 times the base amount, for a maximum of $1/gallon for RD and Bio and $1.75 for SAF. The actual amount will be calculated by multiplying the maximum credit times the fuel’s emissions factor, meaning many producers will earn much less than the current $1/gallon credit. It’s also worth noting again that importers will not qualify for the CFPC after many years of earning the BTC, which may shake up the supply outlook later this year as anyone who can, will race to dump their barrels into a US market before the credit goes away.

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