Markets Around The World Are Seeing Big Swings Over The Past 24 Hours As The Unknowns Of Monetary Policy
Markets around the world are seeing big swings over the past 24 hours as the unknowns of monetary policy, war strategy and storm paths all converge. It’s not unusual for the day after an FOMC announcement to see big price swings, and today in particular is set up for big moves after the FED made it clear it prefers a recession to inflation, and numerous other banks followed suit.
ULSD has been the most volatile contract in the energy complex this week, with multiple 10 cents swings in various directions as demand fears and supply fears manage to both grip parts of the global distillate market simultaneously. Adding to the uncertainty this week, Exxon’s refinery in France is facing a strike as employees see more leverage than ever given the weakened state of Europe’s energy supplies.
2 brothers were killed in the fire at the Husky refinery in Ohio, adding a tragic turn to the supply shortages in the area, which have sent Chicago basis values soaring. That plant is completely offline, and may stay so for weeks as the investigation continues, further complicating resupply efforts. The Explorer pipeline froze nominations shortly following that fire as shippers raced to find replacement options from other regions, quickly maxing out the pipe’s capacity. See the PADD 2 inventory charts below for perspective on how unusually low supplies in the Midwest are as a rash of refinery issues, and lack of shipments from the Gulf Coast – who is busy supplying the rest of the Western hemisphere – draw down stocks. PADD 2 refinery runs did see a 2nd straight large increase, largely due to the BP Whiting plant coming back online after a fire a few weeks ago.
The storm currently known as 98L continues to move towards the Caribbean with 90% odds of development in the next 5 days. Florida looks like it is still has the highest odds of getting hit by this storm (soon to be named Hermine) although the GEFS model has shifted it further West in the past 24 hours which puts Alabama, Mississippi and Louisiana all in the range of potential landing zones. While the odds may still be low, Louisiana has been a hurricane magnet the past two seasons, so those refineries and off-shore facilities will not breathe easy until this system is long gone. Hurricane Fiona meanwhile continues to churn north after battering several islands as a category 3 or 4 storm, and now sets its sites on Atlantic Canada. The Irving refinery in St. John looks like it will avoid a hit from this storm, while the long-idled and struggling to convert to RD production refinery in Come-By-Chance could still take a hit from this system.
Refinery production increased again last week, holding near the top end of the seasonal range as plants defer maintenance to try and continue maximizing output during these times of tight supply (and high margins). Compare this year’s refinery runs to 2021 and 2020 which both saw big storm-induced declines, and you’ll get a feeling for why the industry is still holding its breath to make it another month without a direct hit on refinery row.
One item to keep an eye on (if you didn’t have enough already): US ethanol production dropped to its lowest level since the great freeze of 2021 wreaked havoc on fuel producers of all varieties, which pushed ethanol inventories to their lowest levels of the year. Ethanol prices have been pulling back since the railroads narrowly dodged a major strike, so this drop in production could be a short term anomaly tied to maintenance or timing the corn crop, but if not, it could further complicate the refined fuel supply network since gasoline is no good in most cases without 190 proof grain alcohol to go with it.
West Coast (PADD 5) gasoline stocks look like they turned the corner on the charts with a small increase last week, but that did little to stop the squeeze on prompt supplies as San Francisco values shot up to a $1.70/gallon premium to futures and PNW values traded north of $1.40, which puts current values back close to $4/gallon.
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Energy Markets Rally Again Thursday After A Choppy Wednesday Session
Energy markets are trying to rally again Thursday after a choppy Wednesday session. RBOB gasoline futures are leading the push higher, on pace for a 3rd consecutive day of gains after finding a temporary floor Tuesday and have added 12 cents from those lows.
Equity markets are pointing sharply lower after a weak Q1 GDP estimate which seems to have contributed to a pullback in product prices over the past few minutes, but don’t be surprised if the “bad news is good news” low interest rate junkies start jumping in later on.
The DOE’s weekly report showed sluggish demand for gasoline and diesel, but inventory levels in most markets continue to follow their typical seasonal trends. Refinery runs held fairly steady last week with crude inputs down slightly but total gross throughputs up slightly as most facilities are now back online from a busy spring maintenance season and geared up for peak demand this summer.
Propane and propylene exports spiked to a record high north of 2.3 million barrels/day last week, which demonstrates both the US’s growing influence on global product markets, and the steady shift towards “other” products besides traditional gasoline and diesel in the level of importance for refiners.
The EIA acknowledged this morning that its weak diesel consumption estimates reflected the switch to Renewable Diesel on the West Coast, although they did not provide any timeline for when that data will be included in the weekly survey. The agency acknowledged that more than 4% of the total US consumption is now a combination of RD and Biodiesel, and that number is expected to continue to grow this year. This morning’s note also suggested that weak manufacturing activity was to blame for the sluggish diesel demand across the US, while other reports suggest the freight recession continued through Q1 of this year, which is also contributing to the big shift from tight diesel markets to oversupplied in several regions.
Valero kicked off the Q1 earnings releases for refiners with solid net income of $1.2 billion that’s a far cry from the spectacular earnings north of $3 billion in the first quarter of 2023. The refining sector made $1.7 billion, down from $4.1 billion last year. That is a pattern that should be expected from other refiners as well as the industry returns to a more normal market after 2 unbelievable years. You wouldn’t guess it by looking at stock prices for refiners though, as they continue to trade near record highs despite the more modest earnings.
Another pattern we’re likely to see continue with other refiners is that Renewable earnings were down, despite a big increase in production as lower subsidies like RINs and LCFS credit values sting producers that rely on those to compete with traditional products. Valero’s SAF conversion project at its Diamond Green joint venture is progressing ahead of schedule and will give the company optionality to flip between RD and SAF depending on how the economics of those two products shakes out this year. Valero also shows part of why refiners continue to disappear in California, with operating expenses for its West Coast segment nearly 2X that of the other regions it operates in.
Week 16 - US DOE Inventory Recap
Energy Markets Trading Quietly In The Red As Ethanol Prices Rally To Five-Month High
Energy markets are trading quietly in the red to start Wednesday’s session after a healthy bounce Tuesday afternoon suggested the Israel-Iran-linked liquidation had finally run its course.
There are reports of more Ukrainian strikes on Russian energy assets overnight, but the sources are sketchy so far, and the market doesn’t seem to be reacting as if this is legitimate news.
Ethanol prices have rallied to a 5-month high this week as corn and other grain prices have rallied after the latest crop progress update highlighted risks to farmers this year, lower grain export expectations from Ukraine, and the approval of E15 blends this summer despite the fact it pollutes more. The rally in grain and renewables prices has also helped RIN values find a bid after it looked like they were about to test their 4-year lows last week.
The API reported small changes in refined product inventories last week, with gasoline stocks down about 600,000, while distillates were up 724,000. Crude oil inventories increased by 3.2 million barrels according to the industry-group estimates. The DOE’s weekly report is due out at its normal time this morning.
Total reported another upset at its Port Arthur refinery that’s been a frequent flier on the TCEQ alerts since the January deep freeze knocked it offline and damaged multiple operating units. This latest upset seems minor as the un-named unit impacted was returned to normal operations in under an hour. Gulf Coast basis markets have shrugged off most reports of refinery upsets this year as the region remains well supplied, and it’s unlikely we’ll see any impact from this news.
California conversely reacted in a big way to reports of an upset at Chevron’s El Segundo refinery outside of LA, with CARBOB basis values jumping by more than a dime. Energy News Today continued to show its value by reporting the upset before the flaring notice was even reported to area regulators, proving once again it’s ahead of the curve on refinery-related events. Another industry news outlet meanwhile struggled just to remember where the country’s largest diesel seller is located.
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