Mixed Bag For Energy Futures Thursday

It’s another mixed bag for energy contracts Thursday after a strong showing Wednesday as it became painfully obvious that Russia and Ukraine are a long way off from negotiating a peace agreement, let alone agreeing to one, despite Monday’s optimism. RBOB gasoline futures are once again trying to lead the complex higher, reaching their highest level since the August 1 melt-down, and trading some 9 cents above Monday’s low trade. ULSD futures were following the lead of gasoline overnight, but ran into resistance at the $2.30 mark and have dropped back into the red.

While the action in futures has been very tame since the big selloff to start the month, the action in cash markets is just picking up as we approach the fall RVP transition, a busy refinery maintenance season upcoming, combined multiple upsets this week.

Spot gasoline prices in the Chicago market are up 25 cents in the past two days following news that BP was forced to shut down its Whiting Refinery following flooding rains Tuesday. That event has pushed gasoline differentials in the area to their highest level in nearly a year, and yet those basis differentials are still less than half of the state’s 48 cent/gallon motor fuel tax. You may recall we had a similar spike in basis values last summer after Exxon’s Joliet refinery was nearly wiped out by a tornado and took weeks to recover. The difference with this event is it appears that BP has power at the facility which should allow for faster repairs and restart provided that no units were damaged during the shutdown. A company statement this morning suggested that repairs are progressing at the facility and the flaring noted in that update confirms that restart efforts are already underway.

You’ll also notice some large increases in Gulf Coast basis values, but unlike Chicago in which the spike is driven by a sudden supply shock, the move on the Gulf Coast was caused by the roll to pipelines trading on September cycles, which reference October futures which are the winter-grade spec that is trading roughly 17 cents below summer grades. We’ll see that phenomenon affect West Coast spot markets as well to end the week, which will add another 15-17 cents to basis values for LA and San Francisco, in addition to the gains they’ve already had from healthy bids this week.

Hurricane Erin is beginning its turn away from the Carolina coast this morning, but will continue creating rough seas and some potentially heavy rain for areas along the coast to end the week. The NHC meanwhile is tracking 3 more potential storm systems in the Atlantic. One of those systems is given 70% odds of developing and is on a similar path to Erin but looks like it’s turning north early enough to avoid any direct impact to land. The new system being tracked this AM is in the middle of the Atlantic and is heading east so will be a fish storm. The one to keep an eye on is referred to as AL99, and although it’s still only given 40% odds of developing, the U.S. GEFS model does show some potential for this storm to point towards the U.S. Gulf Coast if its path follows the northern edge of its development range through the Caribbean. Still seems like a long shot at this point, but it can’t be completely written off just yet.

Notes from the DOE’s weekly status report:

Crude shed 6mm barrels on down imports and up exports with most of that decline coming out of PADD 3. Imports are still at above average despite the drop as last week’s level was a high for the year. Exports were the larger factor, adding an additional 22% over the week prior and hitting a seasonal 5-year high. Refinery run changes were tame in all PADDs with most operating well above their seasonal averages as the total utilization rate has held above 95% for each of the past 5 weeks.

Diesel stocks are still low across the country (with the exception of PADD 5 inclusive of RD) despite production jumping up to a 2025 high. A healthy increase in demand was mostly offset by increased production, leaving the big drop in exports as the main driver for the +2mm barrel build in inventories. Gasoline stocks moved the opposite direction again this week, dropping 2.7mm barrels, with the largest changes in PADDs 1-3. PADD 1 bounced after a 4-week straight decline but is still a couple million barrels under the seasonal average. PADD 2 dropped below its 5-year range and has struggled to get back to average after falling under back in May. PADD 3 dipped below just below average after spending the past 5 weeks above but is still tracking ahead of the previous 2 years. Product movements for gas were also opposite diesel, with demand and output declining while exports rose.