Pipeline Fears Ending As Inflation Fears Spread
Energy and equity futures are both pointing modestly lower to start a new week, as pipeline fears are ending, and inflation fears are spreading.
Colonial’s restart continues to progress on schedule, with scheduling systems now back online, in addition to the operating systems that start up last week.
While it will still take several more days to fully alleviate the crunch, improvement is seen all across the region with allocation percentages increasing and outages decreasing from Louisiana to Pennsylvania. Now that the shortage is in the rearview mirror, the focus will turn to what will come next as this situation was a rude awakening of the threats posed to infrastructure, even as the hackers responsible are fleeing to try and avoid the weight of the U.S. coming down on them. New reporting requirements for pipeline systems seems to be a popular prediction for a way that the industry will be forced to change, and will likely come with unintended consequences that will make operating those pipeline systems more challenging.
One painful little detail for renewable fuel proponents who wasted no time last week suggesting that ethanol could help alleviate the supply crunch if the EPA would only allow E15 blends: several supply terminals across multiple states cited a shortage of ethanol for compounding the product shortages as railcar shipments simply couldn’t keep up with the rapidly shifting demand patterns across the region.
Money managers continue to have mixed feelings about energy contracts, with WTI, Brent and RBOB all seeing a drop in the net length held by large speculators last week via new short positions and liquidating old long positions, while ULSD and Gasoil contracts saw their net length increase. The fact that RBOB length didn’t increase as of last Tuesday – when the outcome of the Colonial shutdown was still very much in doubt – suggests the bandwagon jumpers in the hedge fund community are either cautious about gasoline prices, or have lost interest as other commodities seem to be an easier trade as long as inflation is making headlines.
Eight more oil drilling rigs were put to work last week according to Baker Hughes weekly report, the largest gain in nearly two months. The location of those drilling rigs is a bit of a mystery as four of the eight rigs come in the “other” category since they weren’t in the 14 largest basins tracked in the report, and the state by state count is offset by a drop in the natural gas rig count. The fact that the build is coming outside of the Permian (which accounts for more than half of all drilling activity) or one of the other well-known basins, suggests the price environment is good enough to encourage some companies to reach further in their operations.
As predicted last week, the EPA has ordered the St. Croix (island, not river) refinery to cease operations after a string of mishaps rained oil and other chemicals on the local community. Keeping that plant offline will make other Atlantic basin producers breathe a small sigh of relief as it will keep some of the excess capacity out of that market, and perhaps extend the operational life of another facility that would have had to close otherwise.
Speaking of refinery closures, Australia’s government is committing more than $2 billion to keep its last two refineries operating, citing national security concerns if the country is forced to import all of its fuel. This is a dilemma being faced around the world as country’s have suddenly found themselves with traditional refineries closing due to weak economics and public perception, but without a solution to keep their economies rolling without them, other than being forced to buy fuel from countries that may not like them much.
Click here to download a PDF of today's TACenergy Market Talk.
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View AllEnergy Markets Are Ticking Modestly Higher This Morning But Remain Well Off The Highs Set Early Thursday
Energy markets are ticking modestly higher this morning but remain well off the highs set early Thursday following the reports that Russia was temporarily banning most refined product exports.
The law of government intervention and unintended consequences: Russian officials claim the export ban is an effort to promote market stability, and right on cue, its gasoline prices plummeted a not-so-stable 10% following the news.
There’s a saying that bull markets don’t end due to bad news, they end when the market stops rallying on good news. It’s possible that if ULSD futures continue lower after failing to sustain yesterday’s rally, or this morning’s, we could be seeing the end of the most recent bull run. That said, it’s still much too soon to call the top here, particularly with a steepening forward curve leaving prices susceptible to a squeeze, and the winter-demand months still ahead of us. Short term we need to see ULSD hold above $3.30 next week to avoid breaking its weekly trend line.
The sell-off in RIN values picked up steam Thursday, with 2023 D4 and D6 values dropping to the $1.02 range before finally finding a bid later in the session and ending the day around $1.07.
Tropical Storm Ophelia is expected to be named today, before making landfall on the North Carolina coast tomorrow. This isn’t a major storm, and there aren’t any refineries in its path, so it’s unlikely to do much to disrupt supply, but it will dump heavy rain several of the major East Coast markets so it will likely hamper demand through the weekend. The other storm system being tracked by the NHC is now given 90% odds of being named next week, but its predicted path has shifted north as it moves across the Atlantic, which suggests it is more likely to stay out to sea like Nigel did than threaten either the Gulf or East Coasts.
Exxon reported an upset at its Baytown refinery that’s been ongoing for the past 24 hours. It’s still unclear which units are impacted by this event, and whether or not it will have meaningful impacts on output. Total’s Pt Arthur facility also reported an upset yesterday, but that event lasted less than 90 minutes. Like most upsets in the region recently, traders seem to be shrugging off the news with gulf coast basis values not moving much.
Click here to download a PDF of today's TACenergy Market Talk.
The Yo-Yo Action In Diesel Continues With Each Day Alternating Between Big Gains And Big Losses So Far This Week
The yo-yo action in diesel continues with each day alternating between big gains and big losses so far this week. Today’s 11-cent rally is being blamed on reports that Russia is cutting exports of refined products effective immediately. It’s been a while since Russian sabre rattling has driven a noticeable price move in energy futures, after being a common occurrence at the start of the war. Just like tweets from our prior President however, these types of announcements seem to have a diminishing shelf-life, particularly given how the industry has adapted to the change in Russian export flows, so don’t be surprised if the early rally loses steam later today.
The announcement also helped gasoline prices rally 5-cents off of their overnight lows, and cling to modest gains just above a penny in the early going. Before the announcement, RBOB futures were poised for a 5th straight day of losses.
IF the export ban lasts, that would be good news for US refiners that have seen their buyers in south American countries – most notably Brazil – reduce their purchases in favor of discounted barrels from Russia this year.
US refinery runs dropped below year-ago levels for the first time in 6 weeks, with PADDS 1, 2 and 3 all seeing large declines at the start of a busy fall maintenance schedule. Oil inventories continued to decline, despite the drop-in run rates and a big increase in the adjustment factor as oil exports surged back north of 5 million barrels/day. Keep in mind that as recently as 2011 the US only produced 5 million barrels of oil every day, and exports were mostly banned until 2016, so to be sending this many barrels overseas is truly a game changer for the global market.
Chicken or the egg? Cushing OK oil stocks dropped below year-ago levels for the first time since January last week, which may be caused by the return of backwardation incenting shippers to lower inventory levels, the shift to new WTI Midland and Houston contracts as the export market expands. Of course, the low inventory levels are also blamed for causing the backwardation in crude oil prices, and the shift to an export market may keep inventories at the NYMEX hub lower for longer as fewer shippers want to go inland with their barrels.
Refined product inventories remain near the bottom end of their seasonal ranges, with a healthy recovery in demand after last week’s holiday hangover helping keep stocks in check. The biggest mover was a large jump in PADD 5 distillates, which was foreshadowed by the 30 cent drop in basis values the day prior. The big story for gasoline on the week was a surge in exports to the highest level of the year, which is helping keep inventories relatively tight despite the driving season having ended 2 weeks ago.
As expected, the FED held rates yesterday, but the open market committee also included a note that they expected to raise rates one more time this year, which sparked a selloff in equity markets that trickled over into energy prices Wednesday afternoon. The correlation between energy and equities has been non-existent of late, and already this morning we’re seeing products up despite equities pointing lower, so it doesn’t look like the FOMC announcement will have a lasting impact on fuel prices this time around.