Hurricane Expected To Make Landfall
A hurricane is expected to make landfall in the heart of refining country this weekend, US Oil stocks dropped by almost 10 million barrels last week, Iranian boats threatened an oil tanker in the strait of Hormuz, and US equities reached an all-time Wednesday so it’s easy to understand why energy prices have surged to their highest levels in 8 weeks. Then again, it may be just as noteworthy that prices aren’t rallying more given the bullish combination of events, which could mean a price collapse if the literal and figurative storms pass without long term damage.
The storm soon to be known as Barry is not even a tropical depression at this point, but is still forecast to reach hurricane strength over the next 2 days before making landfall over the weekend. The largest concern remains the heavy rainfall amounts forecasts for areas that are already flooded. Reports of precautionary shutdowns at oil platforms and refineries in the storm’s path are increasing, but so far there appears to be no impact to regional supplies.
While futures were rallying sharply Gulf Coast cash markets seemed to largely shrug off the storm, with basis values for USGC RBOB, CBOB and ULSD all little changed from previous levels. While the cluster of refineries along the Mississippi river remain at risk, most of the Colonial pipeline origin points west of the forecasted path, which may explain the lack of concern from physical traders.
Reports that the British Navy had to intervene to stop Iranian vessels from impeding a BP oil tanker in the Strait of Hormuz that broke overnight had oil prices rallying, but they’ve since given back all of those gains, suggesting the Iranian harassment of ships in the region is becoming the energy market equivalent of the “Boy Who Cried Wolf”.
OPEC released its monthly oil market report this morning, which showed the cartel’s output dropped again last month, although Saudi Arabian output increased for the first time in several months, which offset most of the drop in exports from Iran. The cartel also issued its forecast for 2020, which suggests similar supply & demand growth globally as 2019, with developed nations once again picking up the slack from sluggish US & Chinese economies.
The DOE weekly report was largely lost in the shuffle Wednesday, with the large draw in crude oil stocks, and growing refinery runs, in spite of the PES shutdown the most notable items.
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Week 15 - US DOE Inventory Recap
Prices To Lease Space On Colonial’s Main Gasoline Line Continue To Rally This Week
Energy markets are sliding lower again to start Wednesday’s trading as demand concerns and weaker stock markets around the world seem to be outweighing any supply concerns for the time being.
Rumors continue to swirl about an “imminent” response by Israel to Iran’s attacks, but so far, no news seems to be taken as good news in the hopes that further escalation can be avoided, even as tensions near the Red Sea and Strait of Hormuz continue to simmer.
Prices to lease space on Colonial’s main gasoline line continue to rally this week, trading north of 11 cents/gallon as Gulf Coast producers still struggle to find outlets for their production, despite a healthy export market. Gulf Coast CBOB is trading at discounts of around 34 cents to futures, while Gulf Coast RBOB is trading around a 16-cent discount, which gives shippers room to pay up for the linespace and still deliver into the East Coast markets at a profit.
Back to reality, or just the start of more volatility? California CARBOB basis values have dropped back to “only” 40 cent premiums to RBOB futures this week, as multiple flaring events at California refineries don’t appear to have impacted supply. The state has been an island for fuel supplies for many years as its boutique grades prevent imports from neighboring states, and now add the conversion of the P66 Rodeo refinery to renewable diesel production and the pending changes to try and cap refinery profits, and it’s easier to understand why these markets are increasingly vulnerable to supply shocks and price spikes on gasoline.
RIN prices continue to fall this week, touching 44 cents/RIN for D4 and D6 values Tuesday, their lowest level in 6 weeks and just about a nickel above a 4-year low. While the sharp drop in RIN and LCFS values has caused several biodiesel and Renewable Diesel producers to either shut down or limit production, the growth in RIN generation continues thanks to projects like the Rodeo refinery conversion, making the supply in RINs still outpace the demand set by the Renewable Fuel Standard by a wide margin.
The API reported draws in refined products, 2.5 million barrels for gasoline and 427,000 barrels for distillates, while crude oil stocks had an estimated build of more than 4 million barrels. The DOE’s weekly report is due out at its normal time this morning.
Click here to download a PDF of today's TACenergy Market Talk.
Equity Markets Have Been Pulling Back Sharply In Recent Days As Inflation And Trade Concerns Inject A Sense Of Reality Into Stocks
It’s a mixed bag for energy markets to start Tuesday’s session with gasoline prices holding small gains, while oil and diesel prices show small losses as the world anxiously debates what comes next in the conflict, we’re still hoping we don’t have to call a war in the Middle East.
An early sell-off picked up steam Monday morning with refined products down more than a nickel for a few minutes, before reports that Israel was vowing to respond to Iran’s attack seemed to encourage buyers step back in an erase most of the losses for the day.
Equity markets have been pulling back sharply in recent days as inflation and trade concerns inject a sense of reality into stocks that had been flying high earlier in the year. The correlation between gasoline and crude oil prices had been fairly strong for the past couple of months but has since weakened as the weakness in stocks hasn’t yet trickled over into the energy arena. Both asset classes are seeing a tick higher in their volatility (aka Fear) indices this week however, and when fear starts driving the trade, we often see these prices move together.
Diesel has been underperforming the rest of the energy complex for most of the year so far, and those hoping for lower diesel prices got more good news when the Dangote refinery in Nigeria began loading diesel for domestic use Monday, in the latest milestone for the giant project that will have a major influence on Atlantic basin supply. Naturally, local lawmakers are already complaining that the refinery’s prices are too high.
The EIA this morning highlighted the record amount of crude oil China imported in 2023 after reopening the country post-COVID and after completing numerous new refinery builds in the past few years. Russia accounted for the largest increase in shipments to China last year, as China is one of the few countries that doesn’t mind ignoring sanctions. Speaking of which, the US House is expected to take up a new vote this week on sanctioning Chinese imports of Iranian crude, which the EIA notes are often hidden by relabeling the crude to make it appear as if it originated in Malaysia, Oman or the UAE.
We’re just 2 weeks away from the startup of Canada’s long-awaited Transmountain pipeline expansion that will bring roughly 600,000 barrels/day of capacity to the Pacific basin. That new outlet is great news for Canadian producers long restricted by takeaway capacity, and bad news for Midcontinent refiners who have grown accustomed to the discounted Canadian grades. A Bloomberg article Monday noted that Iraq’s Basrah Heavy crude is most likely to be displaced by West Coast US refiners who can now buy much closer to home.
Click here to download a PDF of today's TACenergy Market Talk.