Large Inventory Draws Under Pressure

Market TalkFriday, Oct 16 2020
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Large inventory draws helped energy prices recover from a heavy wave of early selling Wednesday, but they’re under pressure again to start Thursday’s session as doubts linger about the sustainability of those improving fundamentals.  

There’s no doubt that hurricane Delta had a large impact on last week’s numbers reported by the DOE as nearly 20% of refining capacity and essentially all of the oil production in the Gulf of Mexico were in the storm’s path. Now that Delta has passed and damage appears to be minimal (P66 confirmed restart of its Lake Charles facility yesterday) there seems to be much more to worry about with demand than there is with supply. 

Diesel inventories saw their biggest weekly decline in 17 years as refiners made sharp cuts in output thanks to both weak margins and a major hurricane, while consumption held steady thanks in large part to harvest demand peaking across the Midwest.  That was some good news for refiners, and helped ULSD prices erase the heavy selling from earlier in the morning.  The bad news is inventories are still closer to record highs than to average levels, and the cuts in distillate yield aren’t easily sustainable. 

U.S. diesel production reached its lowest level since the aftermath of Hurricane Harvey three years ago. While some of the decline is due to shutdowns ahead of Delta, there is also a real concern that the glut of distillates will continue to weigh on refiners for some time. As the charts below show, refiners are already stretching their product mix to levels we haven’t seen in 20 years as gasoline demand and margins have rebounded, while distillates languish, and there’s not much else they’ll be able to do besides cut run rates completely.

Gasoline inventories are back in a normal pattern, holding below 2019 levels and their five year seasonal average for a second week, even though demand pulled estimates dipped and remain nearly one million barrels/day below where they should be this time of year. Refiners are stretching to maximize gasoline yields just in time for the seasonal demand slowdown, which might make for a sloppy market this winter. 

The refinery formerly known as Hovensa, which used to have a strong influence on NYH prices before being shuttered in 2012 due to weak economics, has been struggling to restart for a variety of reasons after new owners took over. A Reuters report this morning suggests that those new owners are now stuck between needing to start the facility this year to avoid losing its crude supplier, and an oversupplied market that would mean operating at a loss.

One of the two storm systems being watched by the NHC is slightly better organized today and is given 40% odds of developing, but is in a location that suggests it will stay offshore and not threaten the U.S. coastline. The other system is in a more dangerous position in the Caribbean that could move north into the Gulf of Mexico, but it’s still only given 20% odds of developing.

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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.