Mixed Bag For Energy Markets To Start Friday After Thursday Near 3-Month Highs

Market TalkFriday, Jul 14 2023
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It’s a mixed bag for energy markets to start Friday’s session after another strong finish Thursday pushed prices closer to 3-month highs. Supply disruptions and stronger equity markets both seem to be contributing to the recent price rally, while the recession fears seem to have been put on the back burner for now. The moves have not been particularly impressive, however, and there are still mixed messages being sent by the daily and weekly charts, so a pullback in the coming days to relieve an over-bought market is looking likely. 

More than 12 years after a revolution, Libya is still struggling to figure out who’s calling the shots. This week, 3 of the country’s largest oil fields have been shut in due to protests, taking around 400,000 barrels/day of production offline. Libya, Nigeria, Venezuela, and Iran are all exempt from the OPEC & Friends voluntary production cuts, and up until this latest shut-in, that had been a bearish factor on prices as exports from these underachieving producers had been growing.

Another day, another California Refinery having issues: Chevron’s refinery in Richmond CA was forced to shut units on Thursday for unplanned repairs. Basis values across the state had rallied sharply in the past week as a rash of unplanned issues hit the majority of the refineries left in the state, but dropped sharply this week after the DOE report showed actual run rates had increased to a 3-year high despite those operating hiccups. So far the Chevron news hasn’t stirred up much in the SF Bay area spot market, but there’s a chance we could see another big bounce if the downtime is significant.

So far the Texas energy grid has held up well after consecutive days of record energy use.  With another week of near-record heat and energy consumption in the forecast, there is a concern we could end up seeing refinery disruptions if the grid struggles, although it seems very unlikely we’ll see anything resembling the chaotic shutdowns we did in February 2021.

The EPA issued a statement this morning that said it would be announcing decisions involving petitions from small refineries for exemption from the Renewable Fuel Standard at 4 pm Eastern time today. In years past the yo-yo policies on small refinery exemptions (which largely depended on the party controlling the white house at the time) have had an outsized influence on RIN price movements. It’s hard to imagine the current administration changing its stance and suddenly going easy on refiners after denying essentially every petition the past couple of years, but nevertheless, RIN traders will be forced to pay attention this afternoon.

California’s Air Resource Board (CARB) announced another workshop to review potential amendments to its Cap & Trade Program on Wednesday, which sent CCA values rallying Thursday to their highest level in more than a year. While it’s still very much unknown what changes will be proposed, or whether or not those proposals will become law, there’s no mistaking the agency's attempt to make things harder on the industry, which favors higher credit values. LCFS values meanwhile continue their recent slide as the rapid influx of new renewable production continues to increase the supply of those credits, which are generated by renewable producers, whereas the CCA credits are just made up by CARB. 

Subtropical storm Don has formed in the Atlantic, but won’t be a threat to land, and just offers another reminder that while we’re enjoying a Saharan Dust-induced reprieve from hurricane activity at the moment, the stage is set for the tropics to crank up in a hurry at some point this summer. 

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Market Talk Update 07-14-23

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Market TalkFriday, Apr 12 2024

Charts Continue To Favor A Push Towards The $3 Mark For Gasoline, While Diesel Prices May Need To Be Dragged Along For The Ride

Energy prices are rallying once again with the expected Iranian attack on Israel over the weekend appearing to be the catalyst for the move. RBOB gasoline futures are leading the way once again, trading up more than a nickel on the day to reach a fresh 7 month high at $2.8280. Charts continue to favor a push towards the $3 mark for gasoline, while diesel prices may need to be dragged along for the ride.

So far it appears that Motiva Pt. Arthur is the only refinery that experienced a noteworthy upset from the storms that swept across the southern half of the country this week. Those storms also delayed the first round of the Masters, which matters more to most traders this week than the refinery upset.

Chevron’s El Segundo refinery in the LA-area reported an unplanned flaring event Thursday, but the big moves once again came from the San Francisco spot market that saw diesel prices rally sharply to 25 cent premiums to futures. The Bay Area now commands the highest prices for spot gasoline and diesel as the conversion of 1 out of the 4 remaining refineries to renewable output is not-surprisingly creating disruptions in the supply chain.

RIN values dropped back below the 50-cent mark, after the recovery rally ran out of steam last week. The EPA is facing numerous legal challenges on the RFS and other policies, and now half of the US states are challenging the agency’s new rule restricting soot emissions. That lack of clarity on what the law actually is or may be is having widespread impacts on environmental credits around the world and makes enforcement of such policies a bit of a joke. Speaking of which, the EPA did just fine a South Carolina company $2.8 million and require that it buy and retire 9 million RINs for improper reporting from 2013-2019. The cost of those RINs now is about 1/3 of what it was this time last year, so slow playing the process definitely appears to have paid off in this case.

The IEA continues to do its best to downplay global demand for petroleum, once again reducing its economic outlook in its Monthly Report even though the EIA and OPEC continue to show growth, and the IEA’s own data shows “Robust” activity in the first quarter of the year. The IEA has come under fire from US lawmakers for changing its priorities from promoting energy security, to becoming a cheerleader for energy transition at the expense of reality.

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Market TalkThursday, Apr 11 2024

Diesel Prices Continue To Be The Weak Link In The Energy Chain

Energy prices are ticking modestly lower this morning, despite warnings from the US that an Iranian attack on Israeli interest is “imminent” and reports of weather induced refinery outages, as demand fears seem to be outweighing supply fears temporarily. Diesel prices continue to be the weak link in the energy chain with both the DOE and OPEC reports giving the diesel bears reason to believe lower prices are coming.

The March PPI report showed a lower inflation reading for producers than the Consumer Price Index report, leading to an immediate bounce in equity futures after the big wave of selling we saw yesterday. To put the CPI impact in perspective, a week ago Fed Fund futures were pricing in an 80% chance of an interest rate cut by the FED’s July 31 meeting, and today those odds have shrunk to 40% according to the CME’s FedWatch tool.

OPEC’s monthly oil market report held a steady outlook for economic growth and oil demand from last month’s report, noting the healthy momentum of economic activity in the US. The cartel’s outlook also highlighted significant product stock increases last month that weighed heavily on refining margins, particularly for diesel. Given the US focus on ULSD futures that are deliverable on the East Coast, which continues to have relatively tight supply for diesel, it’s easy to overlook how quickly Asian markets have gotten long on distillates unless of course you’re struggling through the slog of excess supply in numerous west coast markets these days. The OPEC report noted this in a few different ways, including a 33% decline in Chinese product exports as the region simply no longer needs its excess. The cartel’s oil output held steady during March with only small changes among the countries as they hold to their output cut agreements.

If you believe the DOE’s diesel demand estimates, there’s reason to be concerned about domestic consumption after a 2nd straight week of big declines. The current estimate below 3 million barrels/day is something we typically only see the week after Christmas when many businesses shut their doors. We know the DOE’s figures are missing about 5% of total demand due to Renewable Diesel not being included in the weekly stats, and it’s common to see a drop the week after a holiday, but to lose more than a million barrels/day of consumption in just 2 weeks will keep some refiners on edge.

Most PADDs continue to follow their seasonal trends on gasoline with 1 and 2 still in their normal draw down period, while PADD 3 is rebuilding inventories faster than normal following the transition to summer grade products. That rapid influx of inventory in PADD 3 despite robust export activity helps explain the spike in premiums to ship barrels north on Colonial over the past 2 weeks. Gasoline also saw a sizeable drop in its weekly demand estimate, but given the holiday hangover effect, and the fact that it’s in line with the past 2 years, there’s not as much to be concerned about with that figure. While most of the activity happens in PADDs 1-3, the biggest disconnect is coming in PADDs 4 and 5, with gasoline prices in some Colorado markets being sold 50 cents or more below futures, while prices in some California markets are approaching 90 cents above futures.

Severe weather sweeping across the southern US knocked several units offline at Motiva’s Pt Arthur plant (the country’s largest refinery) Wednesday, and it seems likely that Louisiana refineries will see some disruption from the storm that spawned tornadoes close to the Mississippi River refining hub. So far cash markets haven’t reacted much, but they’ll probably need more time to see what damage may have occurred.

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Market TalkWednesday, Apr 10 2024

Week 14 - US DOE Inventory Recap