Momentum Is Waning In Refined Product Markets

Market TalkTuesday, Oct 19 2021
Pivotal Week For Price Action

Momentum is waning in refined product markets this week after prices stalled out early Monday and are slipping modestly lower again this morning. While the pullback of 5-6 cents from the 7 year highs set early Monday morning are noteworthy, we’ll need to see prices drop another 7-8 cents in the coming days before they threaten the bullish trend lines that have been in place since the August pullback. In other words, so far this week’s selling looks more like a correction to an overbought market, rather than a reversal of that upward trend.

While refined products are struggling, both WTI and Brent are moving higher this morning, putting downward pressure on crack spreads. Unfortunately for refiners, there’s a double whammy on their margins this week as RIN values reached their highest settlement in nearly 6 weeks yesterday, even though RIN values and crack spreads often move in the same direction.    

Keep an eye on calendar spreads this week, as severe backwardation in futures that’s steadily grown over the past month’s rally seems to be having strong influence on regional cash markets and inventory levels. What we’re seeing today in the RBOB market, with November prices down a penny more than February values, could be a sign of what’s to come once the supply squeeze has passed. For both ULSD and RBOB, we could see 5-10 cents price drops in front month values just to get the curve back to a more normal level. 

This phenomenon is perhaps most glaring in the Group 3 diesel market, where basis values for ULSD dropped to 8 cents below futures, a level we’re used to seeing during the demand doldrums in winter, not during the peak of harvest season where we are today. The weakness in Midwestern diesel values seems to be trickling down to the gulf coast, as shippers will want to avoid moving barrels north to sell at a net loss, which should eventually correct the pricing mismatch.

An EIA report this morning highlights how improvements in drilling and well completion over the past decade allow for more oil to be produced in the Permian basin with lower costs.  Meanwhile, the EIA’s monthly drilling rig report highlights that output per rig is forecast to drop slightly in the coming month as producers sacrifice efficiency during the restart race, but total output is expected to continue climbing along with the drilling rig count. 

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Market Talk Update 10.19.21

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Market TalkTuesday, Jun 18 2024

Prices Moving Higher Today As Market Prepares For Juneteenth Holiday

Refined products are ticking higher for a 2nd day, with RBOB gasoline futures hitting their highest levels of the month at $2.46 overnight, while WTI climbed back above the $80 mark for the first time in 3 weeks.

Markets will be mostly closed tomorrow for the Juneteenth holiday. Spot markets won’t be assessed so most U.S. traders will be taking the day off, even though Nymex contracts will trade in the morning. While rack prices can always change, expect most to stay static tonight through Thursday.

Risk-taking appears to be back in style to start the week, with the S&P 500 and Nasdaq both reaching fresh record highs as big tech stocks continue to lead the way, while the DJIA bellwether index remains well off of the record high it set a month ago. The correlation between daily price moves in energy and equity markets has been weak for most of the year, but the enthusiasm of broad buying across asset classes so far this week has the markings of a classic risk-on rally, although it’s noteworthy the moves across the board are modest, suggesting the exuberance may be slightly less irrational than it was during the dot com bubble. We shall see.

While the still unnamed storm in the SW Gulf of Mexico won’t be a direct threat to the U.S. coastlines, it is a very large system that’s bringing rain to large parts of Texas (even DFW is expected to get thunderstorms from this system) and coastal flood warnings are in effect across the entire coastline of the state, stretching east into Louisiana.

There is a 2nd potential system the NHC gives 20% odds of developing in the same area as the current “Potential Cyclone” over the next week, while the other disturbance near the Bahamas is given 20% odds of being named as it heads towards the SE U.S. coast.

Ukraine’s drones continue to hit Russian energy assets, with a fuel export facility at the Azov seaport set ablaze overnight. Those attacks come amidst Ukrainian forces repelling Russia’s latest offensive near Kharkiv now that U.S. weapons have finally arrived, forcing the Russian president to float new peace options and visit military powerhouse North Korea to purchase more arms.

The CFTC reached a $55 million settlement with Trafigura over 3 separate charges the trading house A) manipulated gasoline markets by “misappropriating” material information from a counterparty in Mexico (not named, but believed to be Pemex), B) gamed the Platts Window to boost a trading position in 2017, C) coerced employees into not cooperating with investigations into the company’s manipulative practices by CFTC and other law enforcement.

Trafigura did not admit fault as part of the settlement, but did state the company had “voluntarily undertaken significant steps to enhance its compliance program…” For anyone who watched the games being played in the Platts window over the past two decades, it seems they may have got off easy. This latest settlement comes just a couple of months after the company was forced to pay $127 million in fines over bribery charges and makes you wonder if there are more charges to come.

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Market TalkMonday, Jun 17 2024

CFTC Commitment Of Traders Report Confirmed Short Covering Was Pushing Up Pricing

It’s a quiet start to the week for energy contracts with modest gains of around a penny in the early going for refined products, while crude oil contracts are up less than 50 cents/barrel.

Houthi Rebels continue to attack ships transiting the Red Sea, with the U.S. Navy forced to rescue the crew from 2 different cargo ships that were struck over the past week.

China’s refineries slowed their run rates in May as planned maintenance and weak margins were both cited as contributing to a pullback from the world’s largest oil importer.

The CFTC’s commitment of traders report Friday confirmed that short covering by money managers was most certainly pushing up prices the week prior. WTI saw nearly half of its large speculative short positions bought back in just 1 week, while Brent’s multi-year high short bets were cut by 20%. In total, more than 62,000 crude contracts and 20,000 diesel contracts were repurchased after funds realized their bet that prices would continue sliding after they’d already hit multi-month lows was a mistake. The unwinding of the big speculators’ bets on lower oil prices will no doubt thrill the Saudi Arabian oil minister who famously threatened the “gamblers” back in 2020.

The National Hurricane Center is tracking 2 potential storm systems this week, one in the SW Gulf of Mexico is now given 70% odds of being named, but is expected to move inland over Mexico and not bring a major threat, but will bring thunderstorms to the U.S. Gulf Coast this week. The other system is only given 30% odds of development off of the coast of Georgia or South Carolina and doesn’t appear to be a threat to energy infrastructure.

The EIA published its annual U.S. refining capacity report Friday, which shows operating facilities as of January 1. It finally caught up with the Beaumont facility expansion completed more than 15 months ago, marking the largest growth in U.S. capacity in nearly a decade. Total operable capacity is still below the peak set in 2019 and is expected to drop further as the P66 Rodeo facility was converted this year, and the Lyondell Houston Refinery is once again expected to shut its doors at the end of the year. Since the government’s report is so far delayed, perhaps the most interesting part is the listing of all refineries that have closed since 1990.

Total reported 24 hours of flaring at its Port Arthur, TX refinery over the weekend. The only unit mentioned as a Flare Gas Recovery system so it appears the event won’t have a major impact on operations.

Baker Hughes reported 4 more oil rigs were taken offline in the U.S. last week, bringing the total count to a 2.5-year low at 488. Natural gas rigs were unchanged on the week at 98, the lowest total since October 2021.

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Market TalkFriday, Jun 14 2024

ULSD Futures Leading The Energy Markets Recovery Rally Today With 6 Week High

The recovery rally continues in energy markets with ULSD futures leading the way reaching a 6 week high this morning. If you were one of the money managers who decided to jump on the short-selling bandwagon at the start of June, you’re now underwater by around $5/barrel for crude oil contracts, and 25 cents/gallon for diesel contracts, which appears to be adding upward pressure to the market as that hot money heads for the exits, and is forced to buy out of their losing bets.

The recovery rally in refined products hasn’t done much to help out refiners that are still looking at their worst summer margins since the COVID lockdowns. The margin outlook is even worse for refiners in other parts of the world, particularly in Asia which is dealing with a glut of supply due to a rush of capacity additions in the past 2 years. Singapore announced this week that it was offering carbon tax rebates for its refiners to try and keep them afloat and able to compete with their new competition from China and Kuwait.

The enemy of my enemy: The American Farm Bureau and Corn Growers associations joined the American Petroleum Institute in a lawsuit Thursday challenging the EPA’s vehicle emissions standards. After the Ag and Oil lobbies have spent decades competing with each other for tax incentives and mandates on ethanol and biodiesel blends, they’ve found common ground in fighting the threat of EVs on their market share, with farmers providing the logical argument that rural communities [and tractors] aren’t conducive to EV use. The Renewable Fuel Association meanwhile is promoting its solution: Plug-in electric hybrid flex-fuel vehicles, or PHEFFVs for not-so-short.

The NHC is now giving 50% odds of development for the storm system brewing off of Mexico’s eastern coastline, but even if that system is named it looks like it will head west over land before threatening the U.S. The other system that threatened Florida this week is now making its way up the East Coast, but won’t be a major storm. Florida is still dealing with flash flooding, but so far there are no reports of terminal outages or port disruptions.

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