Traders Around The World Try To Navigate Regulatory Uncertainty

It’s another quiet start for energy markets with gasoline and crude oil futures hovering near the low end of their trading range as traders around the world try to digest a rapid stream of regulatory uncertainty and currently seem unwilling to make big bets in either direction.

The U.S. Treasury announced another round of sanctions on Iran’s “Shadow Fleet” of tankers that have helped it avoid enforcement of export restrictions for years, but that news hasn’t stopped Brent or WTI from moving modestly lower overnight. It’s worth noting that any Iranian oil taken off the market may be good news for Saudi Arabia as it would give them room to start unwinding OPEC’s voluntary output cuts.

RIN values saw their first round of meaningful selling in several weeks Monday, after the EPA announced it will not prevent several midwestern states from opting out of the 1lb RVP waiver needed to sell ethanol blends in the summertime. The opt out of the summertime RVP waiver is pitched by ethanol proponents as opening the door to E15 blends, while refiners in the region will note that they’re now on the hook to supply a 7.8lb conventional gasoline that they weren’t configured to produce. The EPA did offer an out to any states who want to re-think their plans to overhaul their fuel supply network, if they submit that request in writing by tomorrow. Ohio has already asked to be removed from the change.

Within the RVP Waiver announcement, the EPA noted that a federal rule could be put into effect prior to the April 28 deadline, which would supersede the state rules. One potential outcome is a bill presented by a coalition of midwestern senators that would bypass the waiver requirements to allow year-round E15, potentially without the need for the lower RVP during the summer months. This sets up an interesting game of chicken for midcon refiners who can either scramble now and spend millions trying to prepare to produce 7.8lb RVP and risk having the rug pulled out at the last minute, or sit back and do nothing and risk not being able to produce on spec gasoline in May if the waivers get waived.

Beyond the RVP uncertainty Midwestern refiners are also the most susceptible to the regulatory uncertainty swirling around the potential tariffs on Canadian energy imports which are currently set to start on March 4th, after an 11th hour deal in early February delayed them for a month. Given the configuration of those facilities to run the heavy/sour Canadian grades, they simply can’t switch to lighter sweeter supply from the Permian or Bakken – even if they could clear the big logistical hurdles of sourcing it - without having to dramatically slow their run rates.

On the east coast, it’s Canadian refined products that are the big question mark as Irving’s St. John New Brunswick refinery is the largest supplier into the New England markets, and one of the key importers to the NY Harbor. That company has already made it clear that any tariffs will be passed through as a line item fee on invoices, which will cause a scramble to find alternate supplies that are cheaper than the 20 cents or so that will be tacked on to cover the import tax. Everyone is still guessing about the outcome of the latest tariff deadline, but there has been notable progress in negotiations so far in February, so it is certainly possible that no tariffs are imposed on either Canada or Mexico next week.

Flint Hills reported a power loss at its Corpus Christi refinery to TX regulators overnight. The report said that assessments are still underway, and more detail will be provided in its final report.