Energy Markets Hovering As Traders Seem Uninterested In Making Big Moves

Energy markets are hovering just below break even to start Thursday’s trade with traders so far appearing uninterested in making big moves ahead of expiration day for the September contracts tomorrow and the holiday weekend ahead.

U.S. tariffs on some Indian goods jumped to 50% Wednesday as punishment for continued purchases of Russian Oil. India and China have been key beneficiaries of the sanctions on Russian exports, taking advantage of the refinery loophole buying cheap Russian crude and selling their products to poor countries in desperate need of supply across Europe and California. Like all of the other trade drama, it’s difficult to say at this point whether those tariffs will have meaningful impact on the flow of petroleum or other goods, or even if they’ll last more than a day. Meanwhile, Ukraine hit 2 more Russian refineries overnight while Russia made another large scale attack on civilians in Kyiv.

Exxon announced a final investment decision for a major reconfiguration of its 588mb/day Baytown TX refinery. The project highlights the company’s expectations for declining gasoline demand and will reconfigure units to produce more distillates and base oils used in lubricant and chemical manufacturing. The announcement suggested the company will evaluate similar reconfigurations in the years to come as the industry deals with the reality that oil demand continues to grow globally driven primarily by the plastics and chemical markets, while transportation fuel demand – particularly for gasoline – is declining in the U.S..

A report from the EIA Wednesday highlighted that sluggish demand in the U.S., showing that transportation fuel consumption is still holding below pre-COVID levels. That report did also finally acknowledge the influence of RD in the total distillate demand figures, something that the EIA’s weekly report is still missing.

Can’t catch a break: After years of delays caused by corner cutting in design and typical government inefficiencies, Mexico’s Dos Bocas refinery was knocked offline this week by heavy rains, just as the facility was finally having (relative) success and approaching 50% of its potential capacity. The loss of that output will create more demand for exports from the USGC unless it is able to come back online quickly, which would be a change from what we’ve seen the past 3 years.

Meanwhile, reports from the BP Whiting refinery suggest that facility is running back near full rates after heavy rains knocked it offline a week ago. Chicago RBOB basis levels have given back most of the gains made in the aftermath of that sudden loss of supply, although retailers are sure to try and hold on to the higher values through the Labor Day weekend as those rapid price declines typically create their best margin opportunities.

California’s gasoline basis values were also moving sharply lower Wednesday with both LA and San Francisco differentials dropping by more than 10 cents after spiking north of a 50 cent premium to October futures earlier in the week.

The latest Carbon Allowance auction from California (and Quebec) results were announced yesterday, with the offering selling out at values pushing 4 months highs just under $29. Those results were much stronger than the prior quarterly auction in which bidders weren’t certain if the Cap & Trade program would be hampered by a Presidential decree, or fumbling state regulators who were having a hard time agreeing on an extension. The results of the latest auction suggest buyers are not only convinced that the program will go on, but it’s also likely to be made more stringent.

While Tropical storm Fernand is dissipating over the North Atlantic, the NHC is tracking another potential storm system moving off the African coast today. That system is given 0% odds of developing in the next 2 days, and just 20% odds of being named in the next 7 days so we won’t need to worry about it over the long weekend but will need to check back next week.

Notes from the EIA’s weekly status report:

Crude slid 2.4mm barrels despite heavy declines in exports and refinery runs. While refinery runs were down across all PADDs last week, they’re coming off multi-year highs and holding just above year ago levels which made up the high end of the seasonal 5-year range. PADD 2 saw the biggest drop, with the downtime at BP’s Whiting refinery and Cenovus Lima both likely contributing but is still at the higher end of its 5-year range. Runs for all PADDs remain above average, well above in most cases, and the utilization rate took a 2% hit but is still above its 5-year range as we head into the fall maintenance season.

Diesel stocks dropped with increased export activity and demand rising to a seasonal high. Total U.S. inventories have been running along the bottom end of their range most of the year and remain low across the country, unless you throw in PADD 5’s renewable diesel.

Gasoline stocks fell as well with the net of import/export flows getting wiped out by increased demand. Total gas stocks have been trending downward along the 5-year average line for the past six weeks. PADD 1 saw the biggest drop at almost 2mm barrels and dipped below 2023 levels after spending the majority of this year ahead of the previous two. PADD 2 dropped to its lowest level of the year, marking a seasonal 5-year low. PADDs 3-5 all increased slightly to sit just above average in PADDs 3 & 4 while PADD 5 hits week 4 of seasonal highs.

Ethanol stocks have moved closer to average over the past few weeks after spending most of the year above the 5-year range despite production continuing at high levels over the same period. Ethanol exports dipped on the week but remain at the top end of their seasonal range and show how domestic producers of ethanol are benefitting from both the updated regulations domestically, and new trade agreements internationally.