Energy Markets Rally Making Up For Losses In Previous Sessions

Energy markets are rallying for a 2nd day with both RBOB and ULSD futures up nearly 8 cents off of Monday’s lows, and taking back a majority of the losses made in the previous 4 sessions.

Another about-face from the U.S. president on the Ukraine war that suggested escalation is more likely than peace is getting credit for much of the rally even as the European supply shortfall makes a new round of sanctions seem less likely. Ukraine meanwhile continued to hammer away on Russian energy infrastructure overnight, hitting another refinery and 2 oil pipeline pumping stations.

The API estimated another draw in crude oil and gasoline stocks of 3.8 million and 1 million barrels respectively, while distillate stocks showed a small increase of 518,000 barrels. The DOE’s weekly status report is due out at its normal 9:30 central time this morning.

Bloomberg’s quarterly analysis of global refining capacity showed a drop of 350mb/day in Q2, and even though net expansion is expected in the back half of the year, the world will see a drop in total capacity for this first time since 2021 based on this report. See the Bloomberg tables for more detail. It’s also worth noting that this report doesn’t account for the impacts of Ukraine’s strikes on Russian refineries that are believed to have taken more than 1 million barrels/day of capacity offline. Who will benefit from this? Most likely India and China who are both still building new facilities that will increase global capacity by 700mb/day next year and get to take advantage of Russia and Iran selling below open-market prices to avoid sanctions, while filling Europe’s distillate shortfall.

A Wood Mackenzie study shows that India’s refined product exports are approaching a record high as that new capacity begins to come online, and as domestic ethanol blends have been increased to 20%, allowing the country to sell more of its gasoline elsewhere. India’s diesel exports have also been a critical lifeline to several European nations, which makes the idea of them sanctioning Russian oil buyers easier said than done.

Hurricane Gabrielle is still a major category 3 storm as it makes it’s shift east and will likely still be a tropical storm when it hits Europe this weekend.

The system currently known as AL94 is the one to watch in the US as the European forecasting model suggests it will be a hurricane heading for the Carolina coast Monday night. The U.S. GEFS model shows this model staying offshore, but the Euro model has been more accurate over the past decade so it seems prudent to prepare as if this storm may make landfall. The big shift in the forecast path overnight moved the system further south so now it looks more likely to hit near the border of South and North Carolina. There are no refineries in the area, and most fuel supplies come from inland pipelines so this should not be a supply disrupter although the ports around Charleston, Savannah and Wilmington will likely curtail operations as the storm passes.

The storm further east, AL93 currently, is also likely to become a hurricane next week but both the Euro and GEFS models show it staying offshore. The naming of these two storms will depend on which develops first. Humberto and Imelda are the next two names on the list.

The Citgo Auction appears to be delayed again with new hearings set for late October to allow the companies both named as recommended winners at different times a chance to argue their case.