Parade Of Winter Storms Hits Demand Across The Country

Market TalkWednesday, Feb 10 2021
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Oil and diesel prices are moving higher for an eighth straight day after Tuesday morning’s attempted sell-off proved to be short-lived. RBOB prices are struggling to keep up so far after a large build in U.S. gasoline inventories gave traders reason to pause. Tuesday’s bounce keeps the bullish trend lines intact, and the path open to test the 2020 highs set before COVID lockdowns became a reality even as more fundamental signs suggest this rally may have outkicked its coverage.

The API was reported to show a 3.5 million barrel draw in oil inventories last week, while distillates declined by just under ½ million barrels.  A large build in gasoline stocks of 4.8 million barrels seems to be the reason that the March RBOB contract is the only one of the big 4 petroleum futures trading in the red this morning, while the others add modest gains. The DOE’s weekly status report is due out at its normal time this morning, with the gasoline demand number sure to be closely watched as a parade of winter storms has hit demand across most of the country in the past two weeks.

Speaking of winter weather, a major cold snap is bringing temperatures well below normal for this time of year to a wide area of the country. Already, there are reports that several utilities are putting customers on notice that this could mean curtailments in natural gas availability due to a spike in heating demand. In years past this would often mean a spike in ULSD prices as heating oil demand for homes, and dyed diesel demand for power plant supplemental fuel. While we’ve been in the midst of a very strong rally in ULSD prices the past three months, this latest cold snap doesn’t appear to be doing much so far to add more fuel to the rally, with basis and time spreads hardly reacting over the past several days. A note this morning from the EIA may help explain why as the U.S. Northeast is still sitting on inventory levels for diesel that are well above normal levels.

The latest in the long line of refining casualties in the past year: Exxon announced it is closing one of the three remaining refineries in Australia, despite efforts from the government to bridge the gap until demand picks back up.

The Chevron refinery in Richmond, CA had a spill near its wharf in the San Francisco bay, but it appears that leak was contained, and given its relatively small size of around 600 gallons should not be a major issue for the bay area, or the refineries operations unless additional damage is discovered during the investigation. Bay area fuel diffs have been under heavy pressure lately as local shutdown orders continue to hamper fuel demand.

RIN markets have been relatively quiet this week after several weeks of wild trading as the political football known as the RFS continued to be punted back and forth in Washington. This week the EPA is hearing testimony on a proposed plan by the previous administration to extend the deadlines for complying with the RFS for 2019 and 2020, although a final ruling on that matter isn’t expected until the spring.

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TACenergy MarketTalk 021021

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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.

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

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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.

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

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