November ULSD Has Taken Back Its Place As The Leader Of The Energy Rally

Market TalkThursday, Oct 27 2022
Pivotal Week For Price Action

Someone continues to think it’s a good idea to try and sell refined products in the overnight sessions, even though we’ve seen strong rallies wipe out those losses every day this week.  November ULSD has taken back its place as the leader of the energy rally, setting a new 4 month high for futures, and pushing the spread vs the December contract north of 50 cents/gallon this morning. RBOB is seeing a similar push higher, threatening to break the $3 mark and pushing it’s prompt/2nd month spread north of 33 cents/gallon this morning.   Those big moves in time spreads continue to wreak havoc on basis markets across the country as cash market traders deal with huge basis swings that are often doing nothing more than sliding down the steep backwardation curve.  

Two examples of this phenomenon from Wednesday: Group 3 ULSD dropped sharply and traded 40 cents below November ULSD, but still commanded a premium to the rallying USGC contract that’s trading at a 5 cent premium to December.  In LA we saw CARBOB basis values climb more than 40 cents on the day, but cash values still declined by a nickel for the day as that market rolled to a December reference month.

The best cure for high prices is high prices: Note the spike in West Coast (PADD 5) imports in the charts below from the DOE’s weekly report. That shows how the cargo market reacted to the big price premiums we saw in late September, and those barrels hitting the market then contributed to those prices crashing. Now that we’re seeing NY Harbor prices commanding the huge premiums in October, we should see imports into PADD 1 increase in the next few weeks although the Atlantic basin doesn’t seem to have the spare fuel the Pacific does owing to the chaos in Europe and refinery closures after a decade of Europe and the US East Coast having too much refining capacity.

PADD 1 refinery runs have ticked up to the 2nd highest weekly level since the PES refinery exploded and closed in 2019 as plants return from their fall maintenance and the facilities that had been limping along just trying to survive for the past few years are now finding themselves in the right place at the right time. Right on cue, PBF’s Q3 earnings showed the company made more than $1 billion during the quarter, nearly 18 times more than they made this time a year ago.  

On the other hand, not everything is rosy in refinery land as the largest remaining PADD 1 refiner has reportedly gone through a restructuring and laid off numerous employees across the country. We just witnessed strikes at refineries in France that shut down 4 facilities and contributed to the tight supplies in the US East Coast this month, as workers protested the companies making record earnings while the employees weren’t sharing in that success, and it wouldn’t be surprising if we saw similar reactions at some US facilities following this type of action.

Speaking of Atlantic basin refinery capacity, one detail of the upcoming European sanctions on Russian energy exports is an Italian refinery that could be forced to close due to its links to Russian-owned Lukoil, which would cut the country’s production capacity by 20%.  Germany recently took control of 3 refineries to avoid a similar problem, although it’s still unclear how those facilities will be supplied once the bans start in December.

That uncertainty of oil supply, along with the ongoing release of 1 million barrels/day from the SPR helped push US crude oil exports reached an all-time high last week with more than 5.1 million barrels (214 million gallons) of crude being sent abroad every day.  If that statement makes you want to jump on the export ban bandwagon, take a look at the chart of exports over the past 15 years, and compare oil prices today to the 2008–2013-time frame when crude oil exports were mostly illegal, and prices were still regularly north of $100/barrel. 

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Market Talk Update 10.27.2022

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Pivotal Week For Price Action
Market TalkFriday, May 17 2024

The Recovery Rally In Energy Markets Continues For A 3rd Day

The recovery rally in energy markets continues for a 3rd day with refined product futures both up more than a dime off of the multi-month lows we saw Wednesday morning. The DJIA broke 40,000 for the first time ever Thursday, and while it pulled back yesterday, US equity futures are suggesting the market will open north of that mark this morning, adding to the sends of optimism in the market.

Despite the bounce in the back half of the week, the weekly charts for both RBOB and ULSD are still painting a bearish outlook with a lower high and lower low set this week unless the early rally this morning can pick up steam in the afternoon. It does seem like the cycle of liquidation from hedge funds has ended however, so it would appear to be less likely that we’ll see another test of technical support near term after this bounce.

Ukraine hit another Russian refinery with a drone strike overnight, sparking a fire at Rosneft’s 240mb/day Tuapse facility on the black sea. That plant was one of the first to be struck by Ukrainian drones back in January and had just completed repairs from that strike in April. The attack was just one part of the largest drone attack to date on Russian energy infrastructure overnight, with more than 100 drones targeting power plants, fuel terminals and two different ports on the Black Sea. I guess that means Ukraine continues to politely ignore the White House request to stop blowing up energy infrastructure in Russia.

Elsewhere in the world where lots of things are being blown up: Several reports of a drone attack in Israel’s largest refining complex (just under 200kbd) made the rounds Thursday, although it remains unclear how much of that is propaganda by the attackers and if any impact was made on production.

The LA market had 2 different refinery upsets Thursday. Marathon reported an upset at the Carson section of its Los Angeles refinery in the morning (the Carson facility was combined with the Wilmington refinery in 2019 and now reports as a single unit to the state, but separately to the AQMD) and Chevron noted a “planned” flaring event Thursday afternoon. Diesel basis values in the region jumped 6 cents during the day. Chicago diesel basis also staged a recovery rally after differentials dropped past a 30 cent discount to futures earlier in the week, pushing wholesale values briefly below $2.10/gallon.

So far there haven’t been any reports of refinery disruptions from the severe weather than swept across the Houston area Thursday. Valero did report a weather-related upset at its Mckee refinery in the TX panhandle, although it appears they avoided having to take any units offline due to that event.

The Panama Canal Authority announced it was increasing its daily ship transit level to 31 from 24 as water levels in the region have recovered following more than a year of restrictions. That’s still lower than the 39 ships/day rate at the peak in 2021, but far better than the low of 18 ships per day that choked transit last year.

Click here to download a PDF of today's TACenergy Market Talk.

Pivotal Week For Price Action
Market TalkThursday, May 16 2024

Energy Prices Found A Temporary Floor After Hitting New Multi-Month Lows Wednesday

Energy prices found a temporary floor after hitting new multi-month lows Wednesday morning as a rally to record highs in US equity markets and a modestly bullish DOE report both seemed to encourage buyers to step back into the ring.

RBOB and ULSD futures both bounced more than 6 cents off of their morning lows, following a CPI report that eased inflation fears and boosted hopes for the stock market’s obsession of the FED cutting interest rates. Even though the correlation between energy prices and equities and currencies has been weak lately, the spillover effect on the bidding was clear from the timing of the moves Wednesday.

The DOE’s weekly report seemed to add to the optimism seen in equity markets as healthy increases in the government’s demand estimates kept product inventories from building despite increased refinery runs.

PADD 3 diesel stocks dropped after large increases in each of the past 3 weeks pushed inventories from the low end of their seasonal range to average levels. PADD 2 inventories remain well above average which helps explain the slump in mid-continent basis values over the past week. Diesel demand showed a nice recovery on the week and would actually be above the 5 year average if the 5% or so of US consumption that’s transitioned to RD was included in these figures.

Gasoline inventories are following typical seasonal patterns except on the West Coast where a surge in imports helped inventories recover for a 3rd straight week following April’s big basis rally.

Refiners for the most part are also following the seasonal script, ramping up output as we approach the peak driving demand season which unofficially kicks off in 10 days. PADD 2 refiners didn’t seem to be learning any lessons from last year’s basis collapse and rapidly increased run rates last week, which is another contributor to the weakness in midwestern cash markets. One difference this year for PADD 2 refiners is the new Transmountain pipeline system has eroded some of their buying advantage for Canadian crude grades, although those spreads so far haven’t shrunk as much as some had feared.

Meanwhile, wildfires are threatening Canada’s largest oil sands hub Ft. McMurray Alberta, and more than 6,000 people have been forced to evacuate the area. So far no production disruptions have been reported, but you may recall that fires in this region shut in more than 1 million barrels/day of production in 2016, which helped oil prices recover from their slump below $30/barrel.

California’s Air Resources Board announced it was indefinitely delaying its latest California Carbon Allowance (CCA) auction – in the middle of the auction - due to technical difficulties, with no word yet from the agency when bidders’ security payments will be returned, which is pretty much a nice microcosm for the entire Cap & Trade program those credits enable.

Click here to download a PDF of today's TACenergy Market Talk, including all charts from the Weekly DOE Report.

Pivotal Week For Price Action
Market TalkWednesday, May 15 2024

Week 19 - US DOE Inventory Recap