Energy Markets Rebound On Supply Worries As US Production Sets A Record

Energy markets surged overnight, taking back most of Wednesday’s big losses as supply concerns took center stage once again, helping traders shrug off the drop in global equity markets so far. Refined product prices have pulled back around 3 cents from their overnight highs but are still holding healthy gains of 6.5 cents for ULSD and 2 cents for RBOB futures.

The fireworks came after another one of Russia’s Black Sea ports that you probably can’t pronounce was hit by Ukrainian forces overnight, with a Reuters report saying that the entire 2.2 million barrels/day (roughly 2% of global supply) the facility transports have been shut in temporarily while damage assessments are done. Part of what’s making this attack more remarkable beyond the size of the facility is that it was reportedly carried out via cruise missiles, not just drones, which is a reminder of Ukraine’s growing capabilities in making long-range strikes.

Meanwhile, a note from JP Morgan Thursday suggests that nearly a third of Russian oil exports (around 1.4 million barrels/day) may be stuck on ships due to the U.S. sanctions on Rosneft and Lukoil set to take effect 1 week from today.

Russia is disputing claims that Ukraine’s attacks have taken up to 20% of its refining capacity offline, with Reuters citing unnamed sources and data from within the Russian energy industry that show other facilities running below capacity have been able to increase output to offset the damage done to numerous facilities and create a drop in refined product output closer to just 3%. Given that Russia is known for providing accurate accounts on so many things, this 3% figure seems 100% believable.

U.S. Oil production surged by 2% last week to 13.86 million barrels/day, which smashes the all-time record for oil production in any country, at any time. The fact that this record production is happening with just a fraction of the drilling and fracking crews that operated in years past is a reminder that a long bet on commodities is a short bet on human ingenuity.

California’s governor hinted Thursday that a deal may be getting done to possibly save one of the state’s refineries with details to be announced in a few weeks. P66 is wrapping up the complete shutdown of its 139mb/day LA-area Wilmington refinery as we speak, and Valero is set to close its 145mb/day Benicia (SF area) facility in the spring, despite previous efforts by the state to walk back its years-long war against fossil fuel processors.

The normally sleepy Group 3 market has been on a bit of a rollercoaster in November, with multiple swings in ULSD (X Grade) differentials of 10 cents or more in either direction. Values spiked again as inventories in the region dropped close to a 5 year low at the tail end of what is expected to be a record harvest for corn and soybeans. At least part of the apparent confusion in the diesel market can be blamed on the lack of data due to the government shutdown that prevented traders from knowing how close to the end of that harvest we are. Anyone that’s spent time in the region knows diesel demand will come to a screeching halt once the combines wrap up their work, so the latest spike won’t last long and with steep backwardation in both futures and spreads, there’s a 30-40 cent price drop looming over the next couple of months.

P66 reported flaring at its 150mb/day Borger TX refinery as the company attempts to restart an FCC unit that’s been offline for several weeks of unplanned maintenance. That flaring seems as if it was just a normal complication of startup, which is the most dangerous time for a refining unit, and it didn’t prevent the unit from coming back online. The West Texas and New Mexico regions had been abnormally tight on supplies following upsets at Borger, Valero McKee and HF Sinclair’s Artesia facilities in October, but supplies seem to be easing now.

Notes from the DOE’s weekly status report:

Crude added almost 6.5 million barrels in storage with a large downswing in exports while record-setting production levels continue to climb. Refinery runs surged nearly 5% on the week as plants returned from fall maintenance with all 5 PADDs increasing run rates. All PADDs except 5 are holding or have pushed above average with the East Coast and Rocky Mountain regions exceeding their 5-year ranges, while the West Coast remains below at 73.5% utilization despite the small increase last week. The big increase in US run rates should alleviate any concerns about domestic supplies (outside of the constant California question marks of course) and will help push earnings for domestic refiners to the best levels they’ve had in more than 2 years during the 4th quarter.

Diesel stocks posted a slight draw with increased demand. PADD 1 is still running along the low end of the chart while PADD 2 hit a fresh seasonal 5-year low. PADDs 3-5 remain above average, leaving the total U.S. count wedged between ’23 & ’24 levels.

Gasoline inventories also drew with increased demand, dropping total gas storage below its 5-year range for the first time since the same week of last year. PADD 1 is on week 4 of consecutive ~2-million-barrel decreases and now down to its seasonal low. PADD’s 2 & 3 both increased but PADD 2 is still at the bottom of its chart, around year ago levels, and PADD 3 is on week 3 of running under its 5-year range.