Inflation Reaches A 13-Year High

Market TalkThursday, May 13 2021
Traders Torn As Opposing Trend Lines Converge

Colonial pipeline began restarting operations Wednesday night, and products futures dropped a nickel. Now that the headlines will move on to other stories, traders can no longer shrug off the big selloff in equity markets this week as inflation has reached a 13 year high, and will also consider the looming drop in demand as consumers will (hopefully) stop filling plastic bags with gasoline. Although the media attention will quickly fade once there are no longer lines of cars outside of gas stations to take pictures of, this situation may have changed perception of the refined fuel industry that many were prepared to cancel just a few weeks ago.  

While it may take another couple of weeks for the supply network to truly get back to “normal” as long as product starts flowing again the outages will quickly start to fade. Colonial had not been running at capacity for more than a year prior to this shutdown, so there’s room for extra supply to start moving up the line as operations ramp back up. Values for space on the main gasoline line (Line 1) went positive this week for the first time in over a year as shippers of all varieties wait in the starting blocks to begin the resupply race.

Just as we turn the page on one transportation bottleneck, another one showed up as the I-40 bridge in Memphis was forced to shut after a crack was discovered, disrupting a busy trucking corridor and promising to make an already tight freight market even worse. No word yet if consumers are lining up around Graceland to hoard Elvis memorabilia due to this temporary outage. The good news is that trucks heading to the Valero refinery in Memphis to help supplement supplies across the Southeast during the Colonial downtime don’t have to cross that bridge, but Arkansas suppliers will struggle with this situation.

The DOE’s weekly report Wednesday gave a dose of reality to those expecting demand to hit pre-COVID levels this summer. Total petroleum demand had its biggest weekly drop since stay at home orders smashed all records last year. While gasoline and diesel estimates did see minor declines, most of the huge drop came in the “other oils” category and doesn’t reflect a drop in consumer activity. 

U.S. refining capacity dropped another 50mb/day last week, as the permanent closures announced last year continue to make their way into the official numbers. The drop from 19 million barrels/day two years ago to 18 million today is the worst decline in capacity in nearly 40 years.

Adding fuel to the 200 proof fire: U.S. ethanol inventories dropped to a four-year-low last week, even though ethanol production ticked up by 25mb/day. There’s still another 50mb/day or so of production that hasn’t returned since the pandemic started.

RIN Values continue their parabolic move. D6 ethanol RINS were trading around $.36/RIN this time last year, hit $.80 to start 2021, were at $1.31 a month ago and then shot to $1.90 yesterday. D4 values are approaching the $2 mark.  With ethanol, grain and refined products appearing to be topping out and the demand for imports looking like it will subside thanks to the Colonial restart, the stage is set for a pullback, but the big question is will it be of the collapse variety that the wild RIN market has seen in years’ past or a more modest correction since the refiner obligation for the year is still unknown? 

The best cure for high prices is high prices: Eight companies – Tesla being one of them – have petitioned to be allowed to generate RINs via their electric vehicle production. While it could be years before congress can even get around to reviewing those proposals, and more years before they’d be implemented if signed into law, it’s a good reminder that at $2/RIN there will be no shortage of new producers trying to take advantage of the RFS program. 

Crying uncle: Carl Icahn’s attempt to takeover Delek via a proxy & media battle has failed and CVR announced it would distribute the Delek shares it had accumulated as a special dividend as a result. 

The last straw? The refinery FKA as Hovensa was forced to shut again this week after yet another disruption that rained oil on the surrounding neighborhoods. With the EPA already investigating the facility for permit violations, it seems like the efforts to restart this facility that was closed in 2012 may ultimately fall flat.   

Click here to download a PDF of today's TACenergy Market Talk, including all charts for the weekly DOE report.

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Energy Markets Are Ticking Modestly Higher Heading Into The Easter Weekend With Crude Oil Prices Leading The Way Up About $1.25/Barrel Early Thursday Morning

Energy markets are ticking modestly higher heading into the Easter Weekend with crude oil prices leading the way up about $1.25/barrel early Thursday morning, while gasoline prices are up around 2.5 cents and ULSD futures are about a penny.

Today is the last trading day for April HO and RBOB futures, an unusually early expiration due to the month ending on a holiday weekend. None of the pricing agencies will be active tomorrow since the NYMEX and ICE contracts are completely shut, so most rack prices published tonight will carry through Monday.

Gasoline inventories broke from tradition and snapped a 7 week decline as Gulf Coast supplies increased, more than offsetting the declines in PADDs 1, 2 and 5. With gulf coast refiners returning from maintenance and cranking out summer grade gasoline, the race is now officially on to move their excess through the rest of the country before the terminal and retail deadlines in the next two months. While PADD 3 run rates recover, PADD 2 is expected to see rates decline in the coming weeks with 2 Chicago-area refineries scheduled for planned maintenance, just a couple of weeks after BP returned from 7 weeks of unplanned repairs.

Although terminal supplies appear to be ample around the Baltimore area, we have seen linespace values for shipping gasoline on Colonial tick higher in the wake of the tragic bridge collapse as some traders seem to be making a small bet that the lack of supplemental barge resupply may keep inventories tight until the barge traffic can move once again. The only notable threat to refined product supplies is from ethanol barge traffic which will need to be replaced by truck and rail options, but so far that doesn’t seem to be impacting availability at the rack. Colonial did announce that they would delay the closure of its underutilized Baltimore north line segment that was scheduled for April 1 to May 1 out of an “abundance of caution”.

Ethanol inventories reached a 1-year high last week as output continues to hold above the seasonal range as ethanol distillers seem to be betting that expanded use of E15 blends will be enough to offset sluggish gasoline demand. A Bloomberg article this morning also highlights why soybeans are beginning to displace corn in the subsidized food to fuel race.

Flint Hills reported a Tuesday fire at its Corpus Christi West facility Wednesday, although it’s unclear if that event will have a material impact on output after an FCC unit was “stabilized” during the fire. While that facility isn’t connected to Colonial, and thus doesn’t tend to have an impact on USGC spot pricing, it is a key supplier to the San Antonio, Austin and DFW markets, so any downtime may be felt at those racks.

Meanwhile, P66 reported ongoing flaring at its Borger TX refinery due to an unknown cause. That facility narrowly avoided the worst wildfires in state history a few weeks ago but is one of the frequent fliers on the TCEQ program with upsets fairly common in recent years.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

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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.

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