Numerous Commodities Have Major Selloff
Risk off seems to be the theme this week as numerous commodities and equity contracts had a major selloff Wednesday and have continued moving lower through the overnight session. Minutes from the FED meeting that suggested the endless pile of money being pumped into the economy might someday end got much of the blame for the selling, and is likely to remain a key driving force in price action for months to come.
The PADD 1 vs. PADD 3 gasoline charts below show the impact of Colonial’s shutdown on supply, while the implied demand chart shows how much extra fuel was pumped into Rubbermaid containers last week.
Despite the jump in total gasoline demand, ethanol inventories ticked slightly higher on the week as output surged to a 14-month-high. This is another example of how the best cure for high prices is high prices, as the producers who were forced to shut their doors when prices collapsed last year are now ramping back up. That situation seems to be a microcosm of the global economy, as the supply chain tries to ramp back up to meet the surge in demand as the world reopens.
U.S. diesel inventories declined for a sixth consecutive week, and are now at their lowest level since April of last year. Unless we see diesel supplies start to climb over the summer, we could be in for a tight supply situation this fall when ag demand kicks in, since traditional diesel demand sources such as mass transit are still not back to pre-COVID levels, and yet total demand is already at average levels, and inventories are near the bottom end of their seasonal range.
Refinery runs held steady in PADDS 2-5 last week, but ticked higher in PADD 1 as East Coast refiners were (finally) able to increase run rates at a profitable level due to the disruption. It will be interesting to watch if those PADD 1 rates drop back over the next couple of weeks as the high RIN values hit margins all over, and the short term disruption is no longer offering additional margin. There have been numerous reports of refinery blips due to the severe weather blanketing the gulf coast this week, but so far all of the disruptions seem to be fairly minor and are not interfering with supplies being shipped to other markets.
RIN values did see some modest selling during Wednesday’s session, but the moves were small compared to what we saw in grain, fuel and equity markets. A federal court sided with the new EPA’s request to vacate three small refinery exemptions Wednesday, which could explain the relative strength while everything else was moving sharply lower. With the selling pressure already underway again this morning, this could be the biggest test yet for the runaway rally that’s added 60 cents to RIN values in just over a month.
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Energy Prices Up Over 2% Across The Board This Morning
Refined product futures traded in an 8-10 cent range yesterday with prompt heating oil settling up ~6 cents and RBOB ending up about flat. Oil prices clawed back some of the losses taken in the first two full trading days of the week, putting the price per barrel for US crude back over the $70 mark. Prices are up just over 2% across the board this morning, signifying confidence after the Senate passed the bipartisan debt ceiling bill last night.
The EIA reported crude oil inventories up 4.5 million barrels last week, aided by above-average imports, weakened demand, and a sizeable increase to their adjustment factor. The Strategic Petroleum Reserve continues to release weekly through June and the 355 million barrels remaining in the SPR is now at a low not seen since September 1983. Exports increased again on the week and continue to run well above last year’s record-setting levels through the front half of the year. Refinery runs and utilization rates have increased to their highest points this year, both sitting just above year-ago rates.
Diesel stocks continue to hover around the low end of the 5-year range set in 2022, reporting a build of about half of what yesterday’s API data showed. Most PADDs saw modest increases last week but all are sitting far below average levels. Distillate imports show 3 weeks of growth trending along the seasonal average line, while 3.7 million barrels leaving the US last week made it the largest increase in exports for the year. Gasoline inventories reported a small decline on the week, also being affected by the largest jump in exports this year, leaving it under the 5-year range for the 11th consecutive week. Demand for both products dwindled last week; however, gas is still comfortably above average despite the drop.
The sentiment surrounding OPEC+’s upcoming meeting is they’re not likely to extend oil supply cuts, despite prices falling early in the week. OPEC+ is responsible for a significant portion of global crude oil production and its policy decisions can have a major impact on prices. Some members of OPEC+ have voluntarily cut production since April due to a waning economic outlook, but the group is not expected to take further action next week.
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Prices Are Mixed This Morning As The Potential Halt In U.S. Interest Rate Hikes
Bearish headlines pushed refined products and crude futures down again yesterday. Prompt RBOB closed the month at $2.5599 and HO at $2.2596 with WTI dropping another $1.37 to $68.09 and Brent losing 88 cents. Prices are mixed this morning as the potential halt in U.S. interest rate hikes and the House passing of the US debt ceiling bill balanced the impact of rising inventories and mixed demand signals from China.
The American Petroleum Institute reported crude builds of 5.2 million barrels countering expectations of a draw. Likewise, refined product inventories missed expectations and were also reported to be up last week with gasoline adding 1.891 million barrels and diesel stocks rising 1.849 million barrels. The market briefly attempted a push higher but ultimately settled with losses following the reported supply increases implying weaker than anticipated demand. The EIA will publish its report at 10am this morning.
LyondellBasell announced plans yesterday to delay closing of their Houston refinery, originally scheduled to shut operations by the end of this year, through Q1 2025. The company “remains committed to ceasing operation of its oil refining business” but the 289,000 b/d facility remaining online longer than expected will likely have market watchers adjusting this capacity back into their balance estimates.
Side note: there is still an ongoing war between Russia and Ukraine. Two oil refineries located east of Russia's major oil export terminals were targeted by drone attacks. The Afipsky refinery’s 37,000 b/d crude distillation unit was struck yesterday, igniting a massive fire that was later extinguished while the other facility avoided any damage. The attacks are part of a series of intensified drone strikes on Russian oil pipelines. Refineries in Russia have been frequently targeted by drones since the start of the military operation in Ukraine in February 2022.