Large Inventory Draws Under Pressure
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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View AllEnergy Prices Up Over 2% Across The Board This Morning
Refined product futures traded in an 8-10 cent range yesterday with prompt heating oil settling up ~6 cents and RBOB ending up about flat. Oil prices clawed back some of the losses taken in the first two full trading days of the week, putting the price per barrel for US crude back over the $70 mark. Prices are up just over 2% across the board this morning, signifying confidence after the Senate passed the bipartisan debt ceiling bill last night.
The EIA reported crude oil inventories up 4.5 million barrels last week, aided by above-average imports, weakened demand, and a sizeable increase to their adjustment factor. The Strategic Petroleum Reserve continues to release weekly through June and the 355 million barrels remaining in the SPR is now at a low not seen since September 1983. Exports increased again on the week and continue to run well above last year’s record-setting levels through the front half of the year. Refinery runs and utilization rates have increased to their highest points this year, both sitting just above year-ago rates.
Diesel stocks continue to hover around the low end of the 5-year range set in 2022, reporting a build of about half of what yesterday’s API data showed. Most PADDs saw modest increases last week but all are sitting far below average levels. Distillate imports show 3 weeks of growth trending along the seasonal average line, while 3.7 million barrels leaving the US last week made it the largest increase in exports for the year. Gasoline inventories reported a small decline on the week, also being affected by the largest jump in exports this year, leaving it under the 5-year range for the 11th consecutive week. Demand for both products dwindled last week; however, gas is still comfortably above average despite the drop.
The sentiment surrounding OPEC+’s upcoming meeting is they’re not likely to extend oil supply cuts, despite prices falling early in the week. OPEC+ is responsible for a significant portion of global crude oil production and its policy decisions can have a major impact on prices. Some members of OPEC+ have voluntarily cut production since April due to a waning economic outlook, but the group is not expected to take further action next week.
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Prices Are Mixed This Morning As The Potential Halt In U.S. Interest Rate Hikes
Bearish headlines pushed refined products and crude futures down again yesterday. Prompt RBOB closed the month at $2.5599 and HO at $2.2596 with WTI dropping another $1.37 to $68.09 and Brent losing 88 cents. Prices are mixed this morning as the potential halt in U.S. interest rate hikes and the House passing of the US debt ceiling bill balanced the impact of rising inventories and mixed demand signals from China.
The American Petroleum Institute reported crude builds of 5.2 million barrels countering expectations of a draw. Likewise, refined product inventories missed expectations and were also reported to be up last week with gasoline adding 1.891 million barrels and diesel stocks rising 1.849 million barrels. The market briefly attempted a push higher but ultimately settled with losses following the reported supply increases implying weaker than anticipated demand. The EIA will publish its report at 10am this morning.
LyondellBasell announced plans yesterday to delay closing of their Houston refinery, originally scheduled to shut operations by the end of this year, through Q1 2025. The company “remains committed to ceasing operation of its oil refining business” but the 289,000 b/d facility remaining online longer than expected will likely have market watchers adjusting this capacity back into their balance estimates.
Side note: there is still an ongoing war between Russia and Ukraine. Two oil refineries located east of Russia's major oil export terminals were targeted by drone attacks. The Afipsky refinery’s 37,000 b/d crude distillation unit was struck yesterday, igniting a massive fire that was later extinguished while the other facility avoided any damage. The attacks are part of a series of intensified drone strikes on Russian oil pipelines. Refineries in Russia have been frequently targeted by drones since the start of the military operation in Ukraine in February 2022.