Refinery Fires And Storm Risks Adding To Mixed Markets Start

It’s a mixed start for energy markets to begin the new week with RBOB gasoline following crude oil prices modestly lower while ULSD futures are clinging to small gains. Most petroleum futures contracts touched multi-month lows last week and are looking shaky on the charts, suggesting we could see another wave of selling if prices can’t muster a recovery rally this week. If you’re looking for the contrary argument, money manager positioning suggests there could be a short squeeze ahead that will help avoid a larger sell-off.

Friday’s session was highlighted by several notable moves in basis differentials with mid-continent gasoline differentials soaring by 15-20 cents/gallon following reports of a fire at the 440mb/day BP Whiting refinery, which is the largest facility in the Midwest. Meanwhile, Los Angeles gasoline diffs dropped by more than 20 cents/gallon as the summer RVP season winds down with a whimper. In addition, Gulf Coast diesel diffs came under some heavy selling pressure, which helped push linespace values for Colonial’s line 2 into positive territory for the first time in 9 months.

3 different TX refineries reported upsets to the TCEQ on Friday. Marathon reported an FCCU unit was taken offline at its 631mb/day Galveston Bay (FKA Texas City) refinery after catalyst was found leaking from a valve. Total reported an electrical failure in a diesel hydrotreating unit at its 238mb/day Pt Arthur refinery, forcing a portion of that unit to shut down. Valero reported an upset in an FCC unit at its 200mb/day McKee TX refinery that supplies the TX panhandle, New Mexico and Colorado.

PBF reported unplanned Flaring at its 166mb/day Torrance CA (LA area) refinery Sunday due to a Mechanical/Electrical malfunction. It appears that the flaring has stopped based on the AQMD’s map, and its too early to say whether or not that upset will stall the sell-off in basis differentials that was picking up steam on Friday.

As we wrap up the 3rd week of the US government shutdown, we missed our 3rd straight CFTC Commitments of Traders report on Friday. The ICE version of the COT report showed another large outflow of speculative funds betting on higher energy prices, with both Brent and Gasoil (ULSD equivalent) seeing net length held by money managers dropping by more than 25% on the week, and both contracts have seen that net length slashed in half over the past two weeks as prices reached multi-month lows.

Another way to say that is that the big money funds aren’t seeing the latest sell-off as an opportunity to buy the dip, while producers have been buying back their hedge positions during the latest selloff. If you’re a believer in the adage that hedge funds (aka money managers) tend to get this wrong more often than not, or in the adage that a large short position is a good contrary indicator, then you may see a good buying opportunity at current values as the speculative short interest in Brent just hit a 13 month high, and both times last year we saw shorts in this range prices rallied sharply in the following weeks.

Baker Hughes reported the US oil rig count held steady at 418 last week, while the natural gas rig count ticked up by 1 to 121. Year on year the oil rig count is down by 62 rigs (13%) while natural gas rigs are up 22 (22%). The Primary Vision count of Frac crews also held steady for the week at 175, down 63 crews (26%) from this time last year.

The National Hurricane Center is giving 80% odds of a tropical storm being named in the Caribbean this week, although early forecast models have it hooking sharply north and east back out to the Atlantic. While the odds are low of a US impact at this time, there is still a small chance it could get into the Gulf, so will need to be watched for a while longer.

Ukraine’s attacks on Russian energy assets continued over the weekend with another oil refinery targeted, in addition to one of the world’s largest natural gas processing facilities.