How Long Until Power Comes Back On?

Market TalkThursday, Feb 18 2021
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How long until the power comes back on? That’s the big question being asked by millions of people across the U.S. and Mexico, and a huge proportion of the energy industry as the remnants of a brutal stretch of winter weather moves East, and the thawing out process begins. In addition to the direct impact, the trickle down effects of the collapse in oil, refined products, natural gas and ethylene production are being felt around the world

The refining hubs along the Gulf Coast from Corpus Christi to New Orleans have temperatures above freezing this morning, and should stay that way for the next week, except for a few hours tonight. If that thaw allows most plants to resume operations by the weekend, the impact of this chaotic event should be short-lived. Of course, the warm up also means that more drivers are about to hit the road, while terminals and stations that have been closed for a few days may or may not be able to come back online with supply, power and/or intact pipes to meet demand. 

If you remember the panic buying in the wake of Hurricane Harvey, it’s not hard to imagine that the next few days could create a demand spike as news of the refinery shutdowns hits the mainstream just in time for people to start leaving their homes again, and could create a preventable panic phenomenon which could create supply shortages all on its own.

The Houston ship channel was able to resume limited operations after the ice blocking shipping lanes started to break up, a most unusual occurrence that may have some Texans reluctant to use the phrase “When Hell Freezes over” ever again. 

We did see some heavy selling for about an hour Wednesday morning after a WSJ report that said Saudi Arabia was going to increase its oil output now that prices had recovered. That wave of selling wiped out the early gains for crude and product futures, but was fairly short lived and the march higher picked up later in the morning.

Basis markets continue to show strength for both gasoline and diesel grades across most U.S. spot markets, but those moves are still relatively minor compared to disruptions we’ve witnessed over the past two decades, a testament to the excess capacity in the U.S. and the softer-than-normal demand environment. In addition to stronger spot prices, numerous rack markets stretching from Arizona to Maryland have switched from seeing suppliers having to offer steep discounts to move product during the winter doldrums, to enforcing strict allocations as resupply options become questionable.

The API reported large draws in oil and diesel stocks last week, while gasoline stocks had another large build. The DOE’s weekly report is due out at 10 a.m. central today, and should give some glimpse into the impact on gasoline demand caused by the winter storms that battered the East Coast two weeks ago, that now appear quaint in comparison. Don’t expect the report to move the market much as last Friday’s data doesn’t mean much after almost 1/3 of the country’s refining capacity was forced to cut back this week.

In other non-frozen refinery news this week, Calumet laid out plans to convert part of its Great Falls Montana facility to Renewable Diesel production this week in an SEC filing, joining a long list of refiners looking to jump on the BTC/RIN/LCFS and new Canadian CFS programs that combined can offer more than $4.50/gallon in subsidies for RD production. The company also closed on the sale and leaseback of its Shreveport facility in an effort to save enough cash to survive the weak margin environment that was hammering refineries before the storms hit.

Great Falls Renewable Diesel Opportunity:

We believe Great Falls, which connects western agriculture with West Coast and Canadian clean product markets, presents one of the most compelling opportunities for Renewable Diesel production in North America. We estimate the oversized hydrocracker built in 2016 can be reconfigured to process 10-12,000 BPD renewable feedstock at the lowest capital cost per barrel of any announced industry project.   Hydrocracker conversions are typically faster to market, cheaper, and less technically challenging. In addition, the planned configuration could retain 10-12,000 BPD low-cost Canadian crude processing, providing Montana customers with clean energy and our unique specialty asphalt.  Future dual train operations are currently estimated to generate $220 to $260 million of Adjusted EBITDA assuming mid-cycle market prices and existing environmental market structure (BTC, RINs, LCFS). 
Given strong investor interest in renewables, Calumet expects to utilize third party equity for this unique opportunity, without expending Calumet funds.

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

TACenergy MarketTalk 021821

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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.

Pivotal Week For Price Action
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It’s A Mixed Start For Energy Markets To Start Wednesday’s Session After A Heavy Round Of Selling Tuesday

It’s a mixed start for energy markets to start Wednesday’s session after a heavy round of selling Tuesday. RBOB gasoline futures are clinging to modest gains in the early going while the rest of the complex is moving lower.  

WTI is pulling back for a 2nd day after reaching a 3.5 month high just shy of $80. The pullback pushes prompt values back below the 200-day moving average, reducing the likelihood of a breakout to the upside near term.

ULSD values are down nearly 10 cents for the week and are down more than 26 cents from the high trade set February 9th. That pullback leaves ULSD in neutral territory and could act as a headwind for gasoline prices that still seem poised to at least attempt a typical spring rally that adds roughly 20-30% from winter values.

RIN prices continue their slide this week, with D6 and D4 values reaching new 4-year lows around $.41/RIN Tuesday, which is down just slightly from the $1.62/RIN they were going for a year ago.

HF Sinclair reported a loss for Q4 this morning, with its refining and renewables segments each losing roughly $75 million for the quarter. The change from a year ago in the refining segment is a harsh reminder of the cyclical nature of the business as earnings dropped more than $800 million year on year, with inventory cost adjustments accounting for roughly ¼ of that decline.   

While it wasn’t mentioned in the press release, HFS has the most direct exposure to New Mexico’s recent approval of a clean fuel standard that will start in 2026. That law will no doubt help the company’s struggling Renewables assets in the state but will also create extra costs for their traditional refining operations.

The EIA this morning noted that conditions in the Panama Canal improved slightly in January, allowing Gulf Coast exports to Asia, primarily of Propane and ethane, to increase. While transit capacity is still far below levels we saw before the drought reduced operations in the canal, any improvement offers welcome relief to shippers as they can avoid going the long-way around to avoid the violence in the Red Sea.

France’s navy didn’t waste any time getting into the Red Sea action, shooting down a pair of Houthi Drones less than a day after joining the EU’s official mission to assist in clearing the shipping lanes. It’s not yet clear whether this marks the first official military victory by the French since Napoleon. 

Reminder that the weekly inventory reports are delayed a day due to the holiday Monday.

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